- AUD/USD edges higher to around 0.6325 in Monday’s early Asian session.
- China has launched special initiatives to boost consumption and raise incomes.
- Michigan Consumer Sentiment Index slumped in March to the lowest since 2022.
The AUD/USD pair gathers strength to near 0.6325 during the early Asian session on Monday. The uptick of the pair is bolstered by the weaker US Dollar (USD) and special plans from the Chinese government to boost consumption and raise incomes. Traders brace for the Chinese economic data later on Monday, including Retail Sales and Industrial Production. Also, the US February Retail Sales will be released on the same day.
On Sunday, China announced to boost consumption by raising people’s incomes as a key driver of economic growth. The measures will include stabilizing the stock and property markets, and offering incentives to increase the country’s birth rate, as the government seeks to alleviate the deflationary pressures afflicting the economy.
Additionally, the government will include boosting employment and raising the minimum wage, as well as strictly enforcing the paid annual leave system. Any positive developments surrounding the Chinese stimulus plan could boost the China-proxy Australian Dollar (AUD), as China is a major trading partner to Australia.
On the USD’s front, the University of Michigan (UoM) published its preliminary Consumer Sentiment Index reading for March, showing that the figure fell to 57.9, the lowest since November 2022, from 64.7 in the previous reading. This reading came in below the consensus estimate of 63.1. Meanwhile, the UoM five-year Consumer Inflation Expectation jumped to 3.9% in March, compared to 3.5% in February.
Markets widely expect the Federal Reserve (Fed) will stay on hold when it concludes its two-day meeting on Wednesday. The financial markets have priced in nearly a 75% chance of a quarter-point reduction to the Fed’s policy rate by June, according to the CME FedWatch tool.
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.