- AUD/USD softens to near 0.6190 in Monday’s early Asian session.
- The Fed is anticipated to hold rates steady in the January meeting.
- Trump’s tariff threat could put pressure on the Aussie.
The AUD/USD pair weakens to around 0.6190, snapping the two-day losing streak during the early Asian session on Monday. The markets turn cautious as President-elect Donald Trump will be inaugurated later on Monday. The US market is closed on Monday due to the Martin Luther King Day bank holiday.
Concerns around Trump’s pledges, including tariffs, extending tax cuts, and deportations of illegal immigrants, have contributed to a rise in US Treasury yields and the Greenback before he takes office. Analysts believe that the US Federal Reserve (Fed) future interest rate path will depend on how aggressively the incoming Trump administration follows through on those pledges.
Investors will closely monitor Trump’s executive orders, which he plans to issue just hours after he is sworn into office. The Fed is expected to hold interest rates unchanged at its January meeting and resume the reductions in March, according to a slim majority of economists polled by Reuters.
The possibility of renewed trade tensions between the US and China and the potential of Trump’s higher tariffs could exert some selling pressure on the Australian Dollar (AUD) as China is a major trading partner to Australia. However, the upbeat Chinese economic data on Friday could support the Australian Dollar (AUD). China’s economy grew 5.4% YoY in the fourth quarter (Q4) of 2024, compared to a 4.6% expansion in Q3. This reading came in stronger than the 5% expected by a wide margin.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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