The AUD/USD is impacted by several factors, such as trade-relations and interest rate differentials. Understanding these factors will help you to make accurate exchange rate forecasts.
The AUDUSD is the currency pair that consists of the Australian dollar (AUD) and the United States dollar (USD). It is one of the most popular forex pairs.
A major risk-linked currency, AUD/USD is susceptible to overall trends in market sentiment and can move upwards or decline. It also reflects changes in ‘risk appetite’, which is how much risk investors are willing to take.
Changes in ‘risk appetite’ can be linked to changes in ‘risk sentiment’ and movements in other financial markets. Similarly, a change in commodity prices and the terms of trade will also have an impact on AUD/USD.
Commodity price movements can have significant effects on the Australian economy as the country is a major exporter of metals and coal. Often, these factors are driven by changes in global economic conditions. This is particularly true in the case of China, where a slowdown can lead to a reduction in exports. This will have a negative impact on the AUD/USD.
The AUDUSD exchange rate is heavily influenced by China, as it represents a significant consumer of Australian exports. While other factors, including the interest rate differential between Australia and the United States, also influence the pair, the Chinese economy is by far the most important.
Earlier this week, the Australian dollar jumped 1.6% after reports that China was considering easing its ban on coal imports from Australia. The move would be welcomed by the nation’s coal industry and could boost its economy.
On the other hand, the ongoing US-China economic spat is exerting renewed pressure on the Aussie. Since August, the currency has lost 5.1% against the US dollar.
The Australian Reserve Bank (RBA) is responsible for setting the interest rate to support full employment and the stability of the currency. It also works to maintain a strong financial system and an efficient payment system.
The RBA uses a results-based accountability framework to help communities and organizations get beyond talking about problems to taking action to solve them. This disciplined approach allows people to focus on their own needs and build better programs.
In its December meeting, the RBA voted to raise the cash rate by 25 basis points to 3.10% for the eighth time in a row. It now expects a total of 300 basis point hikes this year, compared to the original prediction that rates would remain at record lows.
This is expected to result in lower interest rates for homeowners, making mortgages more affordable as AUD 400 billion of fixed-rate mortgages mature in 2023. However, it is still unlikely that the RBA will be able to fully slow demand without raising the cash rate much higher than this.
Commodities are physical goods that have an impact on the economy and can be traded in futures markets. They are traded by businesses that need essential goods to produce, farmers and miners who want a fixed price for their products, speculators seeking profit, and consumers looking to protect themselves against inflation.
A key factor in the movement of AUD/USD is commodity prices and the terms of trade (see Box on ‘Trade prices and quantities’). Variations in the price of commodities such as iron ore, natural gas, coal and agricultural products affect Australia’s export pricing and have a large effect on the strength of the Australian dollar.
A rise in commodity prices could boost the value of Australia’s exports, thereby strengthening the Aussie. This is because Australian exporters are often willing to invest in expanding their output capacity when commodity prices increase. This investment is often funded by money (capital) flowing into Australia from elsewhere, which boosts demand for Australian dollars.