- AUD/USD extends the decline to 0.6485 in Monday’s early Asian session.
- Heightened geopolitical tensions in the Middle East underpin the US Dollar and create a headwind for the pair.
- China’s Retail Sales and Industrial Production will be in the spotlight on Monday.
The AUD/USD pair weakens to 0.6485 during the early Asian session on Monday. Escalating geopolitical tensions in the Middle East following an Israeli attack on Iran provide some support to the US Dollar (USD). Later on Monday, investors brace for the release of China’s May Retail Sales and Industrial Production for fresh impetus.
Israel started attacks on Iran on Friday, targeting nuclear facilities and missile factories and killing military leaders. Late Sunday, Iran launched a fresh attack on Israel, with an explosion seen in the coastal city of Haifa. Semi-official Iranian media outlet Mehr News reported on Sunday that the fourth phase of Iran’s operation against Israel has begun. Iranian officials underscored that they would “respond firmly to any adventurism” from Israel.
Amid the rising geopolitical tensions, investors ignored the upbeat US economic data released on Friday. The Michigan Consumer Sentiment Index jumped to 60.5 in June from 52.2 in the previous reading, the first improvement in six months. This reading came in better than the expectations.
Investors will keep an eye on China’s Retail Sales and Industrial Production for May, which are due later on Monday. If the reports show a stronger-than-expected outcome, this could lift the China-proxy Aussie, as China is a major trading partner of Australia.
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.
