Australian Dollar holds gains despite lower-than-expected Trade Surplus from Australia

July 4, 2024 7:39 pm

  • AUD/USD bulls retain firm amid weak US data.
  • May’s strong Retail Sales figures from Australia continue to support the pair, soft Trade Surplus may limit the upside.
  • US traders are out celebrating Independence day.

The Australian Dollar (AUD) held its ground against the USD, maintaining itself in highs since January. This is despite the weaker-than-expected Trade Surplus figures reported during the Asian session as the USD remains weak following Wednesday’s set of soft economic figures reported.

The Australian economy is showing some signs of weakness. However, persistently high inflation is prompting the Reserve Bank of Australia (RBA) to delay potential rate cuts. As potentially one of the last G10 countries’ Central Banks to initiate rate reductions, this could somewhat further extend the gains of the Aussie as markets are also considering rate hikes.

Updated Daily Market Movers: AUD gains strength despite disappointing Trade Surplus data

  • Trade Surplus for May in Australia came in at 5,773M MoM, narrower than the 6,678M expected and a downgrade from 6,548M in the previous reading, according to the Australian Bureau of Statistics on Thursday.
  • Australia’s Goods/Services Exports rose 2.8% on a monthly basis versus the 2.5% decline in the prior month, offering some support to the Aussie.
  • From the Reserve Bank of Australia, this week’s minutes reflected an ongoing preference for holding the policy rate steady, primarily due to “uncertainty around consumption data and clear evidence of financial stress among many households”.
  • With the bank leaving the door open for rate hikes and with Governor Bullock confirming that the bank will do what’s necessary to bring down inflation, the Aussie might extend its gains.
  • Futures markets now assign a 25% probability of a rate hike at the RBA’s August 6 meeting, growing to around 50% in the following meetings.
  • For the Federal Reserve, the market’s anticipation for a rate cut in September remains robust, with a 70% odds placed on the expectation.
  • Wednesday’s soft ADP, Jobless Claims, and ISM Services PMIs definitely boosted the market’s doves confidence of a September cut.

Technical Analysis: AUD/USD continues its strong momentum, outlook favorable for the bulls

The AUD/USD pair retains a robust momentum, with indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) residing deep in positive territory. With the pair in its January highs, it shows a promising outlook.

On the resistance front, 0.6730 and 0.6750 are the next bullish targets. Meanwhile, potential support levels include 0.6670, 0.6650, and 0.6630.

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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