- AUD/USD moves higher to 0.6540 in the early Asian session on Monday, up 0.66% on the day.
- The US S&P Global Composite PMI rose to 55.3 in the November flash estimate from 54.1 previously.
- Australia’s Judo Bank Preliminary Composite PMI surprisingly contracted in November.
The AUD/USD pair attracts some buyers near 0.6540 during the early Asian session on Monday. The US Dollar Index (DXY) falls slightly after hitting a new two-year high despite strong S&P US Purchasing Managers’ Index (PMI) data. Later on Monday, the Chicago Fed National Activity Index for October and the Dallas Fed Manufacturing Business Index for November will be released.
The optimistic US November PMI failed to boost the Dollar. Data released by S&P Global on Friday showed that the US S&P Global Composite PMI rose to 55.3 in the flash estimate for November from 54.1 in October. Meanwhile, the manufacturing PMI improved to 48.8 in November from 48.5 in October, but remains in contraction. The services PMI rose to 57.0 in November from 55.0 in the previous reading, beating the estimate of 55.3.
However, growing expectations of less aggressive rate cuts by the Federal Reserve (Fed) could support the USD. Futures traders are now pricing in a 50.9% chance that the Fed will cut rates by a quarter point, up from about 69.5% a month ago, according to data from the CME FedWatch tool.
On the Australian front, Judo Bank Australia’s preliminary composite PMI contracted surprisingly in November, falling to 49.4 in November from 50.2 previously. A figure below the threshold of 50.0 is considered a contraction of economic activities. The manufacturing PMI improved to 49.4 in November from 47.3 in October, while the services PMI fell to 49.6 in November from the previous reading of 51.0.
The Australian Dollar FAQs
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Balance of Trade. Market sentiment, that is, whether investors bet on riskier assets (risk-on) or seek safe havens (risk-off), is also a factor, with the risk-on being positive for the 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 RBA’s main objective 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 ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter being positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data usually have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, with $118 billion a year according to 2021 data, with China being its main destination. The iron ore price, therefore, may be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD also rises as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and 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, its currency will gain value solely from the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on purchasing imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
