- AUD/USD softens to near 0.6565 in Monday’s early Asian session.
- Trump rekindled trade tensions with new tariffs on the EU and Mexico, weighing on the riskier assets like the Aussie.
- Traders brace for China’s Trade Balance data due on Monday ahead of China’s Q2 GDP report.
The AUD/USD pair extends the decline to around 0.6565 during the early Asian session on Monday. The Australian Dollar (AUD) weakens against the Greenback after US President Donald Trump steps up fresh tariff threats. Investors await the release of China’s Trade Balance data due later on Monday ahead of the Gross Domestic Product (GDP) report for the second quarter (Q2).
Trump said Saturday that the United States (US) will impose a 30% tariff on goods from the European Union (EU) and Mexico that will take effect on August 1. These statements followed the announcement of a 35% duty on Canadian imports, beginning August 1. He also proposed a blanket tariff rate of 15%-20% on other trading partners, an increase from the current 10% baseline rate.
Investors remained cautious as the US Federal Reserve (Fed) is widely expected to hold interest rates steady as it waits to see the impact of tariffs on price pressures. This, in turn, could lift the US Dollar (USD) and create a headwind for the pair. Chicago Fed President Austan Goolsbee warned that ongoing trade policy at the hands of Trump's constant tariff threats could hamper the ability of the Fed to deliver rate reductions that both the broader market and Trump himself want to see.
On Tuesday, China’s GDP for the second quarter and Retail Sales reports will be in the spotlight. China's economy is estimated to have slowed down in Q2 to 5.2% YoY from 5.4% in Q1 as trade tensions with the US added to deflationary pressures. On a quarterly basis, the economy is expected to have expanded 1.0% in Q2, slowing from 1.2% in Q1. If the reports show a surprise upside in Chinese GDP data, this could help limit the China-proxy AUD’s losses in the near term, 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.
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