The Australian Dollar (AUD) stumbled on Thursday, underperforming its major peers following disappointing growth in Australian Retail Sales data for November. Recording a fresh two-year low near 0.6170 during Thursday's European session, the currency's decline was further exacerbated by various economic factors both domestically and internationally. The level of interest rates set by the Reserve Bank of Australia (RBA), the health of the Chinese economy, the price of Iron Ore, and Australia's Trade Balance are significant contributors to the AUD's value fluctuations.
The RBA plays a crucial role in determining the value of the Australian Dollar by setting interest rates at which banks lend to each other. Its primary objective is to maintain a stable inflation rate between 2% and 3%. To achieve this, the RBA can adjust interest rates upwards or downwards, where higher rates generally strengthen the AUD by making it more attractive to investors. Conversely, lower rates tend to weaken the currency. The RBA can also employ quantitative easing or tightening strategies to influence credit conditions; easing tends to be AUD-negative while tightening is AUD-positive.
China, as Australia's largest trading partner, significantly impacts the value of the AUD. A robust Chinese economy typically leads to increased demand for Australian raw materials, goods, and services, thereby boosting the AUD. However, any slowdown in China's economic growth can adversely affect the currency's strength. In recent developments, China's inflation has also contributed to the weakening of the Australian Dollar.
Iron Ore, being Australia's largest export, serves as a critical driver of the AUD. Higher Iron Ore prices usually correlate with a positive Trade Balance for Australia, strengthening the currency. Conversely, falling prices can lead to a negative Trade Balance, weakening the AUD. The recent moderate growth in Australian Retail Sales further compounded the currency's decline. The retail sector recorded a growth of 0.8%, falling short of forecasts of 1%, yet exceeding the previous month's reading of 0.5%. This slower-than-expected growth failed to instill confidence among investors.
Moreover, global market dynamics continue to influence the Australian Dollar's performance. The upcoming release of US official employment data is anticipated to sway market expectations regarding the Federal Reserve's interest rate decisions in its forthcoming policy meeting. Any indication of a more aggressive stance by the Fed could further pressure the AUD against its US counterpart.