The Australian Dollar (AUD) is experiencing a phase of depreciation as a confluence of economic indicators and geopolitical factors weigh on its value. As of Monday, the AUD/USD currency pair hovers near 0.6250, testing the 14-day Exponential Moving Average (EMA) on the daily chart. This comes at a time when the 14-day Relative Strength Index (RSI) for the pair sits close to the neutral 50 mark, signaling a balanced but cautious market sentiment.
The depreciation of AUD is occurring against a backdrop of rising US Dollar strength and concerns over potential trade conflicts. The US Dollar Index (DXY) has risen above 108.00, bolstered by recent US economic data, notably the increase in Initial Jobless Claims to 219,000 for the week ending January 31. This data has reinforced a cautious mood regarding the Federal Reserve's policy outlook, providing further support to the US Dollar.
Inflation figures from Australia also add layers to the unfolding economic narrative. On a monthly basis, Consumer Price Index (CPI) inflation in Australia rose by 0.7% in January, contrasting with December's stagnant reading of 0%. This rise in inflation is critical as it affects the Reserve Bank of Australia's (RBA) policy decisions. The RBA, tasked with maintaining a stable inflation rate of 2-3%, influences the Australian Dollar through interest rate adjustments.
Interest rates play a pivotal role in shaping the AUD's value. The RBA influences these rates, setting the level for Australian banks lending to one another. Currently, traders anticipate that the RBA will cut its cash rate from the current 4.35% at its forthcoming meeting later in February. Such a move would likely add further pressure on the AUD.
The health of Australia's trade balance, which reflects the difference between earnings from exports and payments for imports, is another determinant of the currency's performance. China's status as Australia's largest trading partner makes its economic health particularly impactful on AUD valuations. Presently, growing concerns over the US-China trade war have further weakened the Australian Dollar, given Australia's significant economic ties with China.
Additionally, commodity prices such as Iron Ore can drive the value of the Australian Dollar. Higher prices generally support a positive trade balance for Australia, potentially strengthening AUD. However, current market conditions influenced by geopolitical tensions are creating a more complex environment.
Quantitative easing and tightening measures by the RBA also play a role in determining credit conditions. While quantitative easing tends to negatively impact AUD by increasing money supply, tightening measures can have an opposite effect by reducing it.
The US Dollar's recent gains have been partially attributed to President Trump's statements about implementing reciprocal tariffs on various countries. This announcement has heightened fears of an impending trade war, causing ripple effects across global markets and adding downward pressure on currencies like AUD.