AUD/USD sticks to gains above 0.6300, over one-month top on weaker USD
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Haresh Menghani
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24 Jan @ 09:07 (GMT+0)

AUD/USD sticks to gains above 0.6300, over one-month top on weaker USD

  • AUD/USD attracts some buyers after Trump said that he could reach a trade deal with China.
  • Bets for more Fed rate cuts weigh on the USD amid a positive risk tone and also lend support.
  • Spot prices remain on track to snap a three-week losing streak as traders look to US PMIs.

The AUD/USD pair breakout of a two-day-old consolidative trading range and climbs to over a one-month top, around the 0.6330 area on the last day of the week. Spot prices stick to intraday positive bias through the first half of the European session, with bulls now awaiting a move beyond the 50-day Simple Moving Average (SMA) before positioning for further gains amid broad-based US Dollar (USD) weakness.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, drops to a one-month low amid bets that the Federal Reserve (Fed) will lower borrowing costs further by the end of this year. The expectations were lifted by US President Donald Trump's comments on Thursday, saying that he will demand that interest rates drop immediately. This, along with a generally positive risk tone, undermines the safe-haven buck and provides a goodish lift to the AUD/USD pair.

The global risk sentiment gets an additional boost on Friday after Trump said that he would rather not use tariffs on China and that he could reach a trade deal with the world's second-largest economy. Moreover, Trump's remarks ease inflation concerns and trigger a fresh leg down in the US Treasury bond yields, which turns out to be another factor weighing on the USD. Apart from this, technical buying above the 0.6300 mark contributes to the AUD/USD pair's intraday positive move. 

With the latest leg up, spot prices have now rallied around 200 pips from the lowest level since April 2020 touched earlier this month and remain on track to snap a three-week losing streak. Traders now look forward to the release of the flash US PMIs for some impetus later during the early North American session for some impetus. The focus will then shift to the official Chinese PMIs on Monday, which will influence sentiment surrounding the China-proxy Australian Dollar (AUD).

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.