• AUD/USD wobbles around 0.6500 as investors await the outcome of US-China trade negotiations.
  • The outcome of US-China trade talks will provide certainty for the US economic outlook.
  • The US inflation is expected to have grown at a faster pace in May.

The AUD/USD pair flattens around 0.6500 during European trading hours on Tuesday. The Aussie pair trades in a tight range as investors have sidelined, awaiting the outcome of trade talks between the United States (US) and China in London, which started on Monday.

The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, ticks up to near 99.15.

High-stake trade talks between the US and China are expected impact the US Dollar significantly, which has been battered in past few months. Investors doubted the safe-haven appeal of the US Dollar as market experts warned that the implementation of new economic policies by US President Donald Trump could result in economic shockwaves.

A positive outcome from trade negotiations between the US and China would bring some certainty in come US economic outlook, allowing businesses to strategize their expansion plans.

On the economic front, investors await the US Consumer Price Index (CPI) data for May, which will be released on Wednesday. According to estimates, the US headline and core CPI grew at a faster pace of 2.5% and 2.9%, respectively.

Meanwhile, the Australian Dollar (AUD) trades calmly amid US-China trade talks. The Aussie Dollar will also be impacted by the Sino-US meeting outcome, given that Australia is the leading trading partner of China.

On the domestic front, investors await one-year Consumer Inflation Expectations data for June, which will be released on Thursday. The forward inflation data will influence market expectations for the Reserve Bank of Australia’s (RBA) monetary policy outlook. In May, the inflation data came in at 4.1%.

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.

Source: Fxstreet