The Australian Dollar (AUD) continues to find a stable floor just below the 0.6500 handle against the US Dollar (USD). Wall Street is anxious to hear the outcome of the continuing trade discussions between the United States and China. This important economic event received an unusual level of interest, considering that Australia is China’s largest trading partner. The health of the Chinese economy has an outsized effect on the value of the AUD. This is an important straitjacket for Australian and global markets at a time when it is particularly crucial.
With the trade negotiations still ongoing, participants in the affected markets continue to be on high alert. The AUD/USD pair was little changed during Tuesday’s European session, a sign that most traders are still acting with caution. Investors are hungry for any signs these discussions will bear fruit. They’re convinced that the lessons learned will illustrate how to navigate future shifts in patterns of global trade and international economic stability.
Impact of Trade Negotiations on the Australian Dollar
The Sino-US trade talks are pivotal not only for the United States and China but for Australia, which relies heavily on its trade relationships with both countries. Even if an AUD-positive outcome emerges from these negotiations, it should only strengthen the AUD by restoring investor confidence in the medium term global economic outlook. Any negative news will create a flight to safety that is likely to hurt the Australian dollar.
China’s economy significantly influences the AUD due to its role as Australia’s largest trading partner. When China’s economic indicators are strong, the demand from Australia’s exports to China explode. This is particularly the case for raw materials and commodities. SECOND, it’s even more important to realize that this demand directly supports the value of the AUD. Consequently, changes in the performance of the Chinese economy have the potential to create instant effects on the currency pair.
Past data have shown that positive surprises in Chinese growth indicators are associated with a rise in the AUD’s price. China will continue to move aggressively to meet its resource needs. When Beijing does well economically, that increases demand for everything that Australia exports, which pushes up the value of the AUD relative to other currencies.
Anticipating US Economic Data
On top of the trade talks, investors are waiting for a slew of important economic data in the U.S. Market participants will be closely watching US Consumer Price Index (CPI) data for May, which come out on Wednesday. If so, experts believe inflation will soar in this interim period. They project headline inflation to be 4.1%, with core CPI increasing 2.5–2.9%.
Though we hear far less about these coming US inflation figures, their potential economic impact is equally as profound. This, in turn, can lead to changing global market prospects and impact AUD performance. A surprisingly strong inflation report would likely raise expectations for still tighter monetary policy from the Federal Reserve. This shift would positively and dramatically impact valuing currencies.
Investors are hoping and looking for a one-year Consumer Inflation Expectations number for June. The freight report should be released this Thursday. This new domestic gauge will give us insight into the inflationary pressures that are reshaping consumer behavior. Second, it will cast light on macroeconomic trends in the Australian economy.
The Role of Commodities in Currency Valuation
Australia is endowed with a large, rich resource base that serves as the foundation for its economic success. Among its most important exports is iron ore. The inverse correlation between iron ore price and the value of the Australian Dollar is direct and significant. When iron ore prices go up, the AUD tends to strengthen. This 10-fold increase is a clear indication of a stronger international demand for Australian resources.
In light of this, investors are keeping a close watch on commodity prices amidst the backdrop of ongoing trade talks. Any change to the current global demand or supply dynamic can, and often does, dramatically change the trajectory of which currencies appreciate and which depreciate. A strong Chinese economy usually leads to a lot more imports of Australian iron ore, strengthening the AUD in the process.