- AUD/USD reversed Wednesday’s decent advance and came closer to 0.6500.
- The US Dollar managed to pick up pace on mixed US data ahead of NFP.
- July’s Australian trade surplus widened, and Household Spending was firm.
The Australian Dollar (AUD) slipped on Thursday, with AUD/USD once again under pressure and testing the familiar 0.6500 support zone. The move came as the US Dollar (USD) found buyers ahead of Friday’s all-important Nonfarm Payrolls (NFP) report, after a mixed set of signals from the ADP employment release and the Institute for Supply Management (ISM) services survey.
Inflation still sticky at home
Price pressures remain an issue in Australia. July’s Monthly Consumer Price Index (Weighted Mean) picked up to 2.8% from 1.9% in June, while second-quarter CPI rose 0.7% on the quarter and 2.1% year-on-year. This fuels concerns about inflation and explains why the Reserve Bank of Australia (RBA) is exercising caution.
A resilient economy
Away from prices, the broader economic backdrop is holding up well. The final August Manufacturing Purchasing Managers’ Index (PMI) printed 53.0 and services came in at 55.8, both comfortably in expansion territory. Retail sales jumped 1.2% in June, and the trade surplus widened to A$7.3 billion in July. The labour market also looks sturdy, with unemployment edging down to 4.2% as payrolls grow by 24.5K.
Investment is ticking along too. Private capital expenditure rose 0.2% in the second quarter, and gross domestic product (GDP) surprised to the upside with growth of 0.6% on the quarter and 1.8% annualised.
What the RBA is saying
Earlier this month, the RBA trimmed interest rates by 25 basis points to 3.60% and lowered its 2025 growth forecasts. Governor Michele Bullock has pushed back on calls for deeper cuts, stressing that policy will remain data-dependent. The Minutes of the last meeting hinted that faster easing is possible if the labour market softens, but a gentler pace is more likely if conditions stay tight.
For now, markets expect the RBA to hold the Official Cash Rate (OCR) steady on September 30, with around 26 basis points of cuts priced in by year-end.
China’s recovery still matters
China remains a big swing factor for the Aussie. Second-quarter GDP rose 5.2% YoY, with industrial output up 7%, but retail sales lagged. August PMIs told a mixed story too, with manufacturing slipping to 49.4 while services improved to 50.3. The trade surplus narrowed, and inflation stayed flat. The People’s Bank of China left its Loan Prime Rates unchanged last month, as expected.
Speculators betting against the Aussie
Positioning data shows that traders are still leaning against the currency. Commodity Futures Trading Commission (CFTC) figures revealed net speculative shorts in the Australian Dollar climbing back toward April 2024 levels, at about 100.6K contracts in the week to August 26. Open interest also increased for a fourth straight week, now near 191.2K contracts.
AUD/USD technical landscape
For now, AUD/USD is stuck in a range between 0.6400 and 0.6600. On the topside, resistance lies at 0.6568 (August 14), then 0.6625 (July 24). A breakout could clear the way to November’s peak at 0.6687 (November 7), with the 0.7000 level further out.
On the downside, support comes in at 0.6414 (August 21), followed by the 200-day Simple Moving Average at 0.6385 and the June low at 0.6372 (June 23).
Momentum indicators look muted. The Relative Strength Index (RSI) has slipped back toward 51, showing fading buying conviction, while the Average Directional Index (ADX) near 13 signals a weak underlying trend.
AUD/USD daily chart
Near-term outlook
With no clear catalyst on the horizon, AUD/USD looks set to remain range-bound. A stronger run of Chinese data, a shift in Federal Reserve policy, or a surprise move from the RBA would be needed to break the stalemate.
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.
