Australian Dollar holds losses on unchanged PBOC rates

AUD dipped as the PBOC left its one-year and five-year Loan Prime Rates unchanged on Tuesday.
Hawkish RBA comments on rising neutral rates keep potential future Australian interest rate hikes alive.
CME FedWatch Tool suggests that markets expect a Fed hold in October, pricing in an 82.8% chance of a December hike.

AUD/USD inches lower after two days of gains, trading around 0.6970 during Asian hours on Tuesday. The currency pair remains subdued as the Australian Dollar (AUD) holds its losses following the latest interest rate announcement from the People’s Bank of China (PBOC). On Tuesday, China's central bank decided to keep its benchmark Loan Prime Rates (LPRs) unchanged, maintaining the one-year LPR at 3.00% and the five-year LPR at 3.50%.

Análisis de TMGM: noticias de mercados financieros, calendario económico e información del mercado

However, the Australian Dollar may find support following hawkish comments from a top central bank official. Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent questioned whether current interest rates are restrictive enough, noting evidence that neutral interest rates are rising both in Australia and internationally.

RBA’s Kent suggested that a higher neutral rate could mean the current 4.6% cash rate is exerting less downward pressure on demand and inflation than anticipated, keeping the door open for potential future rate hikes. Investors are now looking ahead to RBA Deputy Governor Andrew Hauser's upcoming speech this week for further guidance on the monetary policy outlook.

Meanwhile, Federal Reserve Chair Kevin Warsh expressed optimism regarding the strength of the US economy last week, though he refrained from signaling whether or when additional rate increases might occur. According to the CME FedWatch tool, fed funds futures traders anticipate the Federal Reserve will hold interest rates steady at its October policy meeting, while pricing in an 82.8% probability of a rate hike in December.

Dollar softens as markets reassess near-term Fed tightening

Analysts at Scotiabank observe that the "USD is mixed to a little softer on the session as markets continue to reconsider near-term Fed tightening expectations," with recent Fed communication prompting investors to scale back the likelihood of imminent policy moves.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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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