The AUD/USD currency pair remains under pressure on Tuesday, luring in sellers for the fourth straight day. Trading around the 0.6630 mark, the pair has seen a slight decline of just over 0.10% during the Asian session. This new development comes on the heels of some critically important economic data. How healthy the Australian and Chinese economies are makes a big impact on how valuable the Australian dollar is.
Here’s a look at three key factors that could influence the AUD/USD pair beyond today’s instant action. Australia has long been recognized both for its bountiful natural resources and their attendant curse, with iron ore their largest export. The success of this sector is inextricably tied to the economic success of China, Australia’s largest trading partner. Second, the Chinese economy is important in establishing the AUD/USD exchange rate. When growth data from China surprises one way or the other, it’s always a positive or negative development for the Aussie dollar.
Economic Indicators Affecting AUD/USD
Several important economic indicators are the major driving forces behind the Australian dollar to U.S. dollar exchange rate (AUD/USD). Continuing Aussie inflation is a worry for Aussie investors as higher prices hurt consumers and economic growth in general. A higher inflation rate could prompt the Reserve Bank of Australia (RBA) to adjust interest rates, further influencing the currency’s value.
Additionally, Australia’s rate of growth is the other key ingredient. Recent mixed employment data that came out last Thursday served as a reminder that the labor market is not as robust as it may seem. Investors would appreciate that there is an urgent need for continued strong growth to prop up the Australian dollar, especially against its US counterpart.
Last, but not least, the Trade Balance affects the AUD/USD dynamics. A trade surplus generally leads to an appreciation in the value of the Australian dollar, whereas a trade deficit will depreciate it. Australia’s biggest trading partner has long been China. Given that any shift in trade relations between these two countries would have profound implications on the AUD/USD cross, it is worth noting.
Impact of Chinese Economic Performance
And of course, the direct connection mentioned above goes through the economic performance of China as well, affecting the Australian dollar and its trading pairs. China’s demand for Australian resources, especially iron ore, drives most of what the AUD/USD pair does. Recent shocker macro data from China released on Monday has deepened fears about future demand for Aussie exports.
As we know, any positive or negative surprise in Chinese growth data produces an immediate reaction, up or down respectively, in Aussie dollar value. When China releases better-than-expected growth numbers, traders interpret these as indicating healthier demand for Aussie commodities. All this new demand would greatly increase the value of the AUD. On the other hand, if data comes in weaker than expected, markets will be worried about declining demand which is bad for the AUD/USD exchange rate.
As traders process this positive announcement and all others around the globe, they continue to see how connected our world – and our economies – are. The volatility in China has the potential to dramatically change investor perception on Australia’s dollar.
Market Sentiment and US Dollar Influence
Broader market dynamics are a key driver to shaping currency values. The USD Index (DXY) hovers around its lowest point since October 7th. This decline occurs against the backdrop of increasing expectations for additional Fed interest rate cuts. This backdrop shapes how traders view the AUD compared to the USD.
A declining US dollar often lifts currencies linked to commodities like the Australian dollar. Persistent concern over inflation and economic growth in Australia curtails that optimism. The AUD/USD cross has benefitted from a three-week rise. It will likely get hit with intense follow-through selling this time thanks to compounded pressures.