As indicated by the red circle, the Australian Dollar (AUD) has made a substantial pull back since then. It is under threat from wider economic changes, including interest rate movements directed by the Reserve Bank of Australia (RBA), and continued trade tensions—most notably with China. The RBA is largely responsible for determining the value of the AUD. It achieves this main purpose by conducting interest rate policies directed towards maintaining stable inflation between 2-3%. Australia’s very high dependence on exports, particularly to China, perpetuates elevated currency vulnerability. Though dependency on iron ore is continuing to complicate the factors at play around the AUD’s movements.
By now, the AUD/USD pair is hovering in a tight range from 0.6274 to 0.6342. This absence of clear movement creates confusion in the market. These analysts are calling this a bullish technical outlook in the short term. Indeed, they note that without a clear breakout above the 0.6340 level, any sustained upward momentum cannot be confirmed. That combination of domestic monetary policy and the global economic environment will continue to guide where the Australian Dollar goes.
Role of the Reserve Bank of Australia
The Reserve Bank of Australia significantly influences the AUD by setting interest rates that govern lending practices among Australian banks. So, when the RBA raises or lowers one of these rates, it quickly passes through to raising or lowering economy-wide borrowing costs. A new, lower interest rate regime typically spurs more borrowing and spending. This is good for lifting up the economy. In contrast, when the RBA increases interest rates, it wants to reduce inflationary pressures by increasing the cost of borrowing.
The RBA’s stated primary aim is to keep inflation between 2-3% stable. By increasing or decreasing interest rates, the RBA tries to control inflation right within the target range. Recent trends indicate that the bank may lean towards an accommodative monetary policy to support economic recovery, especially in light of global uncertainties. If inflation were to consistently exceed acceptable thresholds, that may prompt a reevaluation and pivot back to a more restrictive monetary policy. This adjustment can potentially increase the value of the AUD.
Like all central banks, the RBA raises and lowers interest rates to cool down or stimulate the economy. They employ quantitative easing and tightening tactics to influence credit conditions. The negative effect on the AUD represents the most common impact of quantitative easing. It increases the overall money supply, something that can lead to depreciation. Conversely, quantitative tightening tends to be bullish for the currency due to liquidity being drained. These strategies highlight the fine line that the RBA must walk between stimulating economic growth and keeping their currency stable.
Impact of Trade Relations and Commodity Prices
Australia’s economy is very dependent on exports — especially to China, it’s largest and most important trading partner. The second most important factor affecting AUD value is the underpinning health of the Chinese economy. So when China’s economy is booming, it’s hugely increasing its demand for raw materials, goods and services from the Australian supply-chain. This increase in demand has the effect of greatly inflating the value of the AUD.
Iron Ore prices are doubly important in this context. Iron ore is currently one of Australia’s largest export commodities. The very large impact of changes in its prices on the trade balance, the measure of a country’s earnings from exports minus what it spends on imports. Higher Iron Ore prices usually lead to a positive Trade Balance, which further supports confidence in the AUD. If current trade tensions deepen, demand for Australian exports might fall by more than one-third. A softening Chinese economy could place further downside pressure on the AUD.
The current geopolitical environment has exacerbated these risks. Ongoing trade tensions between Australia and China have introduced a level of uncertainty. This would be bad news for investor sentiment towards the AUD. Given how much the markets are focused on these developments, a negative outcome could result in added volatility of the currency.
Technical Outlook for AUD/USD Pair
The AUD/USD technical picture is at a very important stage, with the trading range between 0.6274 and 0.6342. Analysts point out that this wide range indicates confusion in the market with no clear direction in the past few trading days. A clear and convincing breakout above the 0.6340 level may establish reclaiming bullish momentum and imply some extension upside for the AUD.
Market participants are closely eyeing economic data points. They’re reading between the lines on comments from RBA members looking for clues as to what’s coming on interest rates. Solid looking employment numbers and a picture of strong consumer spending could all build confidence that the Australian economy is firing. In turn, we would expect a higher AUD.
Or if the data reveals signs of economic weakness, traders may begin to gravitate towards safer currencies such as the US Dollar. Increasing geopolitical tensions could cause this turn to happen more quickly. Such a scenario would likely place strong downward pressure on the AUD/USD pair and warrant close watch by investors.