AUD/USD struggles to perform despite sheer weakness in US Dollar
- AUD/USD is marginally higher even though the US Dollar has faced strong selling pressure.
- The US private sector added fewer job-seekers in February.
- The US-China trade war has exerted significant pressure on the Australian Dollar.
The AUD/USD pair is slightly higher to near 0.6280 in North American trading hours on Wednesday. The Aussie pair trades marginally higher while the US Dollar (USD) plunges due to multiple headwinds, such as an intensifying trade war and escalating Federal Reserve (Fed) dovish bets.
The Australian Dollar (AUD) is facing significant selling pressure amid a trade war between China and the United States (US). China has announced retaliatory tariffs on the US, resulting in an escalation in trade war between them. Earlier, US President Donald Trump had imposed an additional 10% tariff on China, along with 25% on Canada and Mexico, for pouring drugs into the US economy.
The Aussie Dollar is also the victim of the US-China trade war, knowing that the Australian economy relies heavily on exports to China. Higher tariffs on China have made Chinese products less competitive globally.
Domestically, the Reserve Bank of Australia (RBA) is unlikely to cut interest rates again sooner as their battle against inflation is not over yet, RBA minutes for the February policy meeting showed in which it reduced the Official Cash Rate (OCR) by 25 basis points (bps) to 4.10%.
Meanwhile, soft ADP Employment data for February is expected to exert more pressure on the US Dollar. The ADP reported that private employers added 77K fresh workers, lower than estimates of 140K and the former release of 186K. Soft labor demand in the US private sector is expected to prompt Fed dovish bets, which had already increased due to weak Personal Spending data for January.
For more information about the current status of US employment, investors will focus on the Nonfarm Payrolls (NFP) data for February, which will be released on Friday.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.