The AUD is on a roller coaster ride driven by a cocktail of domestic monetary settings and global economic news. The Reserve Bank of Australia (RBA) has long been central to this process, actively managing the value of the AUD. It controls the economy by adjusting interest rates to ensure inflation is within 2% and 3%. Additionally, China’s economic health and the price of Iron Ore significantly affect the Australian currency’s performance. More recent data coming out of the United States and China have weighed heavily on the AUD’s movement. Economists across the world have their eyes glued to the RBA’s next interest rate call and the next few major US employment numbers.
RBA’s Monetary Policy and Its Impact on the AUD
The Reserve Bank of Australia (RBA) controls the Australian Dollar and its value by implementing monetary policy and changing interest rates. In turn, these changes directly impact the availability of interbank lending. Conversely, the RBA is the one that very much controls these rates. Their stated intent is to maintain a moderate and stable inflation rate between 2% and 3%. This stability, in turn, is vitally important for building economic growth, as well as maintaining consumer confidence. When the RBA increases interest rates, it is usually a sign of a booming economy. This policy pivot can lead to an AUD appreciation as investors flood into Australia seeking higher returns.
In addition to interest rates, the RBA uses quantitative easing and tightening strategies to change credit conditions. Since increasing the money supply is usually AUD-negative, quantitative easing has that direct channel as well. On the flip side, quantitative tightening – a process that shrinks the money supply – is typically AUD-positive. These tools are used to pump money into the economy when it needs stimulation, or pump the brakes on runaway growth when that’s inappropriate.
The interest rate level is arguably the biggest factor influencing the AUD. As we’ve discussed previously, higher rates attract foreign investment, boosting demand for the currency. Depreciation can be accelerated by lowering rates. These initiatives serve to make Australian assets less attractive to international investors. As such, the RBA’s monetary policy decisions are among the most-watched by market participants.
Influence of Iron Ore Prices and Trade Balance
Iron Ore prices are perhaps the second most important determinant of the value of the AUD. As one of Australia’s major exports, Iron Ore plays a vital role in shaping the nation’s trade balance. Any time Iron Ore prices increase, Australia enjoys a positive trade balance as the value of earnings from exports grows. The resulting surplus increases demand for the AUD, making it a stronger currency.
What strengthens the inverse relationship of Iron Ore prices to the AUD even more is Australia’s economy, which is focused heavily on exports. As global demand for iron ore increases, foreign purchasers must pay increased AUD to finalize their transactions. This surging demand pushes up the value of the Australian dollar. This dynamic underscores the significance of Australia’s export performance in determining its currency’s strength.
Boosting the AUD is a significantly positive trade balance – higher revenue from export sectors vs import expenditures. A prolonged trade surplus reflects a strong economy and improves investors’ confidence in the Australian economy.
China’s Economic Health and Other Global Factors
Given that China is Australia’s biggest trading partner, its economic health has a profound effect on the value of the AUD. When China’s economy does well, it increases its demand for raw materials and goods from Australia. This increase in demand tends to increase the value of the AUD. For that reason, all else being equal, strong economic news from China usually has a strengthening effect on the Australian dollar.
In that context, China’s NBS Manufacturing PMI recently popped above contrarian expectations to 50.5 in March, with its Non-Manufacturing PMI shooting up to 50.8. The good news is that these figures indicate growth in both manufacturing and non-manufacturing sectors alike on our home shores. A robust Chinese economy translates into more demand for Australian exports, buoying a relatively high AUD.
As such, on a global level, the AUD tends to track closely with other major economies’ economic developments. According to the US Personal Consumption Expenditures (PCE) Price Index, consumer prices accelerated in February by 2.5% from a year earlier. This data straight from the US Bureau of Economic Analysis shines a light on the matter. These kinds of economic indicators are important because they can help shape global investor sentiment and risk appetite.
Future Outlook: Key Events and Potential Barriers
Market participants are looking forward to the RBA’s interest rate decision on Tuesday. Additionally, traders are eagerly awaiting the release of the US ISM Manufacturing PMI data. All three events should serve to give further guidance for the AUD/USD currency pair. The RBA’s decision on interest rates will be particularly influential as it reflects Australia’s monetary policy stance amid evolving global economic conditions.
AUD/USD first major resistance level now at 0.6330. This new level is above the previous high, reached on March 26th. A decisive move above this line would likely set off a rally. Further decline could send the price below 0.6355, thereby confirming support at the 100-day Exponential Moving Average (EMA). Traders will be looking at these levels all week for breakout opportunities.