The AUD/USD currency pair is under heavy pressure, trading below 1.0800 in early trade on Friday. While this movement occurs, global risk sentiment has increased significantly. It comes on the heels of U.S. President Donald Trump’s decision to impose new tariffs on imported cars and light trucks. The unexpected nature of the announcement has raised fears that a new period of U.S.-China trade confrontation could increase volatility in global markets.
Performance of the Chinese economy has been one of the biggest factors for the value of the Australian Dollar (AUD). Furthermore, swings in the Trade Balance and Iron Ore prices are key components to this equation. Even with all these bearish killers, the duo has enjoyed its fourth day of sideways consolidation. So far it’s holding this range in the 0.6300-area during the first half of the European session.
Impact of Global Risk Sentiment on AUD/USD
More recently, President Trump announced plans to impose new tariffs on imported cars and light trucks. This decision has sent shockwaves through international markets, with considerable effect on risk sentiment. These surprising announcements have sent the AUD/USD pair tumbling. As a result, investors are taking a hard look at what this might mean for the future with greater trade barriers.
The tariffs have sparked fears of costly retaliation from our trading partners, which would further strain global trade flows. As a commodity currency, the Australian Dollar is especially sensitive to any shifts in the global trade landscape. The issues with regard to these tariffs have helped lead the Euro/US Dollar cross to its current levels under 1.0800.
Asides from US-China trade war, many market participants are looking to China as a big bellwether for where the Chinese economy is heading. China has been Australia’s biggest trade partner for several years now. Its economic wellbeing has significant impact – positive or negative – on demand for Australian exports. Either a positive or negative surprise on Chinese growth data can move the Australian Dollar’s value by a large amount. These volatility spells, in turn, hit its trading pairs.
The Role of Trade Balance and Iron Ore Prices
The Trade Balance is the second most important factor affecting the value of the Australian Dollar. It is a measure of the value that the country obtains from its exports relative to the amount it spends on its imports. Normally, a positive net Trade Balance would strengthen the AUD, whereas a negative balance could do the reverse.
Iron Ore prices are typically the other main driver of the Australian Dollar. When the price of Iron Ore increases, the demand for the AUD increases. This drives up demand for Australian goods, increasing the value of the Australian dollar. Each additional $10 USD/tonne higher iron ore prices raise the likelihood of Australia achieving a positive trade balance by 10%. This flood of capital into Australia makes the Australian dollar (AUD) more expensive.
We know that China is a primary consumer of many of our raw materials. This means the health of its economy is deeply tied to the global demand for iron ore. When China’s economy does well, it increases its demand for Australia’s raw materials, goods, and services. This New Zealand surge in demand serves to strengthen the AUD and thus raises its value.
Expectations of further stimulus from China are lifting the AUD. At the same time, fears of an ongoing global trade war still persist. Measures that underpin Chinese economic prosperity will be in Australia’s interests, as they’ll increase demand from Chinese consumers for Australian exports. In turn, the AUD’s value is likely to appreciate.
Influence of Reserve Bank of Australia Policies
The Reserve Bank of Australia (RBA) very consciously intervenes to control the value of the Australian Dollar. It accomplishes this primarily through controlling interest rates. The Bank looks to maintain a low and stable inflation rate of 2-3%. It does this by raising and lowering interest rates in a counter-cyclical way.
By changing interest rates, the RBA can move the needle on credit availability. It should utilize quantitative easing and quantitative tightening as supplemental tools to amplify its influence. Knowledge, skills and education Quantitative easing usually depreciates the AUD since it expands money supply. Conversely, quantitative tightening appreciates the AUD through decreasing that supply.
Market participants pay close attention to the RBA’s monetary policy decisions. These decisions have an enormous effect on forex rates. Given the current long positions, even minor indications of a policy pivot would cause major movements in the AUD/USD pair.
In recent months, optimism for additional stimulus from China has lifted the Australian Dollar. Further, expectations of long-term monetary policy stability from the RBA have played this role too. Stepped up global trade tensions only add to the concern. Their prospective negative effects on economic growth are casting long shadows over sentiment in the market.