The AUD/USD pair has retreated to around 0.6680 during Thursday's Asian trading hours, following a modest rise in the previous session. This decline comes after the release of Australia's Consumer Inflation Expectations, which decreased slightly to 4.6% in January from 4.7% in December, suggesting that households still foresee high price levels.
The Reserve Bank of Australia (RBA) has maintained its cash rate at 3.6% for a third consecutive meeting in December. Despite acknowledging a significant reduction in inflation from its 2022 peak, recent data indicate a potential resurgence of inflationary pressures. November's headline inflation eased to 3.4% year-over-year, marking the lowest level since August, yet still remaining above the RBA's target range of 2–3%.
In the United States, the Census Bureau disclosed on Wednesday that Retail Sales grew more than anticipated, reaching $735.9 billion in November, a 0.6% increase following a 0.1% decline in October, surpassing market expectations of a 0.4% rise. Additionally, the Producer Price Index (PPI) showed a strong increase in November, with both the headline and core measures rising to 3% year-over-year. Market participants are keeping a close eye on the upcoming US Initial Jobless Claims report and comments from Federal Reserve officials later on Thursday.
Recent data also showed a drop in the US Unemployment Rate to 4.4% in December. These developments reinforce the likelihood that the US Federal Reserve (Fed) will maintain current interest rates for the foreseeable future, potentially bolstering the US Dollar (USD). Following the recent jobs report, Morgan Stanley analysts have revised their expectations for rate cuts, moving them from January and April to June and September.
Key Factors Influencing the Australian Dollar
The Australian Dollar (AUD) is significantly impacted by the interest rates set by the Reserve Bank of Australia (RBA). As a resource-rich nation, the price of Australia’s primary export, Iron Ore, also plays a crucial role. Other influences include the state of the Chinese economy, Australia's largest trading partner, as well as domestic inflation, economic growth, and trade balance. Market sentiment, or whether investors are favoring risky assets (risk-on) or safe havens (risk-off), also affects the AUD, with risk-on environments benefiting the currency.
Impact of the Reserve Bank of Australia
The RBA affects the AUD by setting interest rates that impact borrowing costs across the economy. Its primary objective is to keep inflation within the 2-3% range by adjusting interest rates. Higher rates compared to other central banks generally support the AUD, whereas lower rates can weaken it. The RBA also employs quantitative easing and tightening to influence economic conditions, with easing being AUD-negative and tightening AUD-positive.
Influence of China's Economic Health
China's economic performance is a major factor for the AUD, given China's status as Australia's largest trading partner. A robust Chinese economy boosts demand for Australian exports, thereby increasing demand for the AUD and pushing up its value. Conversely, a slowdown in China can negatively impact the AUD.
Iron Ore Prices and the Australian Dollar
Iron Ore is Australia's top export, with China as the main buyer. Fluctuations in Iron Ore prices can thus influence the AUD. Generally, rising prices lead to a stronger AUD due to increased demand, while falling prices can have the opposite effect. Higher Iron Ore prices often contribute to a positive trade balance for Australia, further supporting the AUD.
Trade Balance Effects
The trade balance, the difference between a country's export earnings and import expenses, can also affect the AUD. If Australia's exports are in high demand, the AUD strengthens due to increased foreign demand. A positive trade balance generally boosts the AUD, while a negative balance can weaken it.