AUD/USD gains traction above 0.6350 on weaker US Dollar
- AUD/USD drifts higher to near 0.6370 in Monday’s early Asian session, adding 0.25% on the day.
- China vowed to adopt more targeted measures to stimulate consumer spending, supporting the Aussie.
- Renewed trade tensions could boost the US dollar and cap the upside for the pair.
The AUD/USD pair edges higher to near 0.6370 during the early Asian session on Monday. The Australian Dollar (AUD) attracts some buyers as the Chinese government announced rural revitalisation plans in its annual policy blueprint.
According to the State Council’s annual rural policy blueprint, China will intensify rural reforms to revitalize the agriculture sector and strengthen food security in the face of US tariffs, an economic slowdown, and climate change. Additionally, Premier Li Qiang said on Thursday that China will direct more efforts to boosting consumption and lifting people's livelihoods. Any positive development surrounding China’s stimulus plans could lift the China-proxy Australian Dollar as China is a major trading partner to Australia.
The downbeat US economic data drags the Greenback lower and creates a tailwind for AUD/USD. Data released by S&P Global on Friday showed that the Composite PMI declined to 50.4 in February versus 52.7 prior. Meanwhile, the Manufacturing PMI climbed from 51.2 in February to 51.6 in January, beating the estimation of 51.5. Finally, the Services PMI dropped from 52.9 in January to 49.7 in February, weaker than the 53.0 expected.
Investors will keep an eye on inflation data this week and closely monitor the tariff headlines from US President Donald Trump. Any signs of uncertainty and escalating trade tensions could boost the US Dollar (USD), a safe-haven currency.
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.