Forex News
- US Dollar Index softens to around 99.70 in Monday’s Asian session.
- Trump said new Iran talks would begin Monday after he called off a planned attack on Iran.
- US NFP data will be in the spotlight on Friday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.70 in the Asian trading hours on Monday. The DXY declines amid improved risk sentiment. Traders brace for the release of the US ISM Manufacturing Purchasing Managers Index (PMI) report, which will be released later on Monday.
US President Donald Trump said on Sunday that he had called off an attack on Iran and that talks between the two sides would happen on Monday. Trump suggested an agreement on reopening the Strait of Hormuz may be close and added that he would also continue to pursue a path to end Iran’s nuclear program.
Hopes of a breakthrough between Washington and Tehran could undermine a safe-haven currency such as the US Dollar against its rivals in the near term.
All eyes will be on the US employment data on Friday. This report could offer some hints on the health of the labor market. Economists expect Nonfarm Payrolls (NFP) to increase by 91,000 in July, while the Unemployment Rate is projected to rise to 4.3% during the same period. In case of stronger-than-expected outcomes, this could help limit the DXY’s losses.
The Federal Reserve (Fed) held the interest rates unchanged at its July policy meeting last week. Markets have priced in nearly a 64.7% chance of a US rate hike in September, down from about 77% before the July Fed meeting, according to the CME FedWatch tool.
Dollar seen under renewed pressure as Fed rate expectations fade
According to analysts at Commerzbank, the Dollar is likely to come back under pressure once tensions with Iran subside, as they judge that the Fed is "unlikely to raise rates as markets have priced in." In their view, the easing of geopolitical risk would remove a key support for the currency, leaving it more vulnerable to disappointment on the US rate path.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
- USD/CAD attracts some buyers, albeit it lacks follow-through amid a combination of diverging forces.
- A slump in oil prices undermines the Loonie and supports spot prices, though a weaker USD caps gains.
- The focus shifts to this week’s key macro releases, including key jobs reports from the US and Canada.
The USD/CAD pair kicks off the new week on a positive note, though it lacks bullish conviction and remains confined within Friday's broader range. Spot prices currently trade around the 1.4030 region, up less than 0.10% for the day amid mixed fundamental cues.
Crude oil prices tumble after US President Donald Trump cancelled a threatened attack on Iran, claiming Mideast allies have reached the parameters of a deal to end the five-month-old war. Adding to this, the OPEC+ members agreed to increase oil production by 188,000 barrels per day in September, exerting additional pressure on the black liquid. This, in turn, undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair, though the prevalent US Dollar (USD) selling bias caps further gains.
1An intraday slump in crude oil prices eases inflation fears and tempers bets for an immediate interest rate hike by the US Federal Reserve (Fed). Furthermore, aggressive follow-through short-covering around the Japanese Yen (JPY) drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, to its lowest level since June 17. This, in turn, warrants some caution for USD/CAD bulls and positioning for any meaningful recovery from sub-1.4000 levels, or a one-and-a-half-month low touched last Thursday.
Market participants now look forward to this week's important US macroeconomic releases, scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later today. The focus, however, will be on the crucial monthly employment reports from the US and Canada, due on Friday, which will play a key role in influencing the USD/CAD pair in the near term. Apart from this, further developments surrounding the Middle East crisis might continue to infuse volatility and provide some meaningful impetus.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
Japan's Finance Minister Satsuki Katayama said on Monday that she has no comment on whether there was foreign exchange (FX) intervention today, Reuters reported.
Earlier Monday, Katayama stated that Japanese authorities conducted coordinated Yen-buying intervention with the United States (US) on Friday, adding that officials will not hesitate to carry out more FX intervention with Washington.
Meanwhile, US Treasury Secretary Scott Bessent stated that Friday’s coordinated FX moves curbed disorderly Japanese Yen (JPY) swings. Bessent said that the Treasury will stay vigilant and maintain close communication with counterparts at the Ministry of Finance (MoF) and the Bank of Japan (BoJ).
Key quotes from Japan's Katayama
Conducted coordinated yen-buying intervention with U.S. on Friday.
Won't hesitate to carry out more forex intervention with U.S.
Intervention aimed at tackling recent excessive, disorderly yen moves.
Japan plans to use Federal Reserve’s foreign and international repo facility in future.
Japan remains vigilant and in close contact with U.S. Treasury counterparts.
No comment on forex intervention except Friday.
Market reaction
The Japanese Yen (JPY) attracts some buyers following the headlines. At the time of writing, the USD/JPY is down 0.62% on the day at 156.35.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
- The Australian Dollar remains strong despite China’s manufacturing PMI easing to 50.9 in July.
- The US Dollar faces pressure following Japan’s $58.97 billion yen-buying intervention and easing risk aversion.
- US-Iran diplomatic claims remain contested, keeping market sentiment cautious as Iranian forces stay on high alert.
AUD/USD depreciates after opening at a bullish gap, remaining in the positive territory and trading around 0.7030 during the Asian hours on Monday. The currency pair maintains its gains as the Australian Dollar (AUD) remained resilient, supported by economic developments in China, Australia's major trading partner.
China’s RatingDog Manufacturing Purchasing Managers' Index (PMI) eased to 50.9 in July from 51.7 in June, missing market expectations of 51.5; it continued to signal expansion in manufacturing activity.
Aussie inflation surprise seen as fuel-driven but still above RBA target
BNY’s Geoff Yu notes that RBA Assistant Governor Sarah Hunter characterised Australia’s latest CPI print as “a touch softer” than anticipated, with the downside surprise in headline inflation “mainly driven by lower fuel prices.” Hunter’s comments underscore that the moderation in price pressures is narrowly focused, rather than signalling a broader disinflation trend, and come against the backdrop of inflation still running above the RBA’s 2–3% target band.
The US Dollar (USD) struggles against major peers following official confirmation from Japan regarding joint currency interventions. Japanese authorities confirmed they carried out coordinated yen-buying operations with the United States, with Bank of Japan data pointing to spending of up to $58.97 billion on Thursday. Tokyo further signaled its readiness to intervene again if necessary, noting that close communication with US counterparts remains ongoing.
Pressure on the Greenback was further compounded by a broader easing of market risk aversion, spurred by potential diplomatic developments between the US and Iran. Sentiments shifted after reports indicated US President Donald Trump paused planned military strikes. In a post on Truth Social, President Trump stated that Iran and neighboring Middle Eastern nations had requested time to finalize a deal, a proposal that would lead to the complete reopening of the Strait of Hormuz and address Iran's nuclear program.
However, financial markets remain cautious as Iranian officials swiftly contested these claims. Reporting via Iran's Mehr news agency, officials characterized the assertion that Tehran sought a pause as "nothing but a new lie." They emphasized that Iranian military forces remain on high alert and fully prepared for any eventuality, keeping geopolitical uncertainty elevated.
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.
- NZD/USD strengthens around 0.5890 in Monday’s early Asian session.
- China’s RatingDog Manufacturing PMI eased to 50.9 in July, weaker than expected.
- Trump said Iran talks would begin on Monday.
The NZD/USD pair holds positive ground near 0.5890 during the Asian trading hours on Monday. The New Zealand Dollar (NZD) remains firm despite the downbeat Chinese economic data. Traders will closely monitor the developments surrounding the US-Iran peace talks and await the release of the US ISM Manufacturing PMI data, which is due later on Monday.
Data released by RatingDog on Monday showed that China's RatingDog Manufacturing Purchasing Managers' Index (PMI) declined to 50.9 in July from 51.7 in June. This figure came in below the market consensus of 51.5. The weaker-than-expected PMI data has little to no impact on the China-proxy Kiwi.
Bloomberg reported on Monday that US President Donald Trump said that a new round of Iran talks would begin Monday afternoon after he cancelled a planned attack on Iran partially in response to pleas from US allies in the Middle East, including Saudi Arabia.
Nonetheless, Iranian officials said that Trump’s claim that Tehran had requested a pause “was nothing but a new lie” and that the Iranian armed forces were “on high alert and ready for any eventuality,” per Iran’s Mehr news agency.
Any progress on US-Iran talks could improve risk sentiment and lift the NZD against the USD. On the other hand, signs of escalating tensions in the Middle East could boost a safe-haven currency such as the Greenback and create a headwind for the pair.
Kiwi rate expectations climb as swaps curve nears RBNZ neutral range
Brown Brothers Harriman’s Elias Haddad highlights that market pricing has turned notably more hawkish, with the New Zealand swaps curve now “price in 60bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% – near the top of the RBNZ estimated neutral range (2.20%-4.10%).” This reinforces the view that firmer domestic data and above-target inflation are feeding directly into expectations for a more aggressive RBNZ policy path.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
- AUD/JPY attracts heavy sellers for the fifth consecutive day amid a broadly firmer JPY.
- Japan-US confirm a bilateral FX intervention, prompting aggressive JPY short-covering.
- Reduced RBA rate hike bets and China’s dismal PMI keep AUD bulls on the defensive.
The AUD/JPY cross turns lower for the fifth straight day after a modest uptick to the 111.20 region on Monday and drops to its lowest level since early April during the Asian session. Spot prices currently trade around the 110.00 psychological mark, down over 0.50% for the day, and seem vulnerable to extending last week's sharp retracement slide from the highest level since early June.
Japan's Finance Minister Satsuki Katayama confirmed on Monday that Japanese authorities conducted a rare, bilateral foreign exchange market intervention with the US on Friday to halt the Japanese Yen's (JPY) decline. Moreover, US Treasury Secretary Scott Bessent said on Sunday that Washington would not hesitate to participate in further coordinated action if disorderly moves in the JPY persist. This prompts aggressive follow-through JPY short-covering and turns out to be a key factor exerting pressure on the AUD/JPY cross.
Meanwhile, the Bank of Japan (BoJ) maintained a hawkish bias at the end of the July meeting on Friday and showed readiness to continue pushing up borrowing costs, lending additional support to the JPY. The Australian Dollar (AUD), on the other hand, struggles to lure buyers amid diminishing odds for an immediate rate hike by the Reserve Bank of Australia (RBA). Moreover, the disappointing release of China's RatingDog Manufacturing PMI keeps AUD bulls on the back foot and validates the negative outlook for the AUD/JPY cross.
According to TD Securities, Governor Ueda’s latest remarks marked a clear shift in tone, with the bank observing that he “sounded the most hawkish that he's been in a long while.” Strategists note that his guidance came “just close to short of forward guidance that September is a done deal for a 25bps hike,” underscoring the market’s growing conviction that the BoJ could move again as soon as next month.
Strategists at Deutsche Bank highlight that the latest inflation data have tempered expectations for further RBA tightening, noting that annual core inflation “edged up from +3.5% to +3.6%, but remained below the consensus estimate of +3.7%, reducing the urgency for additional interest rate hikes after the RBA already raised rates three times this year.” This softer-than-expected core print, alongside weaker headline inflation, is seen as diminishing the case for near-term policy action and weighing on the Aussie.
Japanese Yen Price Last 7 Days
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies last 7 days. Japanese Yen was the strongest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -1.19% | -1.04% | -4.47% | -0.41% | -0.49% | -1.50% | -0.91% | |
| EUR | 1.19% | 0.14% | -3.34% | 0.79% | 0.71% | -0.32% | 0.28% | |
| GBP | 1.04% | -0.14% | -3.58% | 0.65% | 0.57% | -0.47% | 0.14% | |
| JPY | 4.47% | 3.34% | 3.58% | 4.23% | 4.15% | 3.09% | 3.62% | |
| CAD | 0.41% | -0.79% | -0.65% | -4.23% | -0.10% | -1.09% | -0.50% | |
| AUD | 0.49% | -0.71% | -0.57% | -4.15% | 0.10% | -1.02% | -0.43% | |
| NZD | 1.50% | 0.32% | 0.47% | -3.09% | 1.09% | 1.02% | 0.60% | |
| CHF | 0.91% | -0.28% | -0.14% | -3.62% | 0.50% | 0.43% | -0.60% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
- GBP/USD drops despite a weaker US Dollar as Trump's paused strikes boosted US-Iran diplomatic hopes.
- President Trump stated Middle Eastern nations requested extra time to finalize a deal with Iran.
- The BoE signaled possible rate hikes if US-Iran conflict uncertainties drive up inflation.
GBP/USD holds losses after three days of gains, trading around 1.3470 during the Asian hours on Monday. The currency pair may regain its footing as the US Dollar (USD) struggles under easing risk aversion, driven by hopes of a diplomatic breakthrough between the United States (US) and Iran following reports that US President Donald Trump held off on planned strikes.
In a post on Truth Social, US President Trump stated that Iran and other Middle Eastern nations requested additional time to finalize an agreement, a proposed deal that would lead to the "immediate, complete, and total" reopening of the vital Strait of Hormuz while effectively eliminating Iran's nuclear threat.
However, high market uncertainty persists as Iranian officials swiftly dismissed the claims. According to Iran's Mehr news agency, Iranian officials characterized Trump's assertion that Tehran sought a pause as "nothing but a new lie," emphasizing that the Iranian armed forces remain on high alert and fully prepared for any eventuality.
The Bank of England (BoE) opted to leave interest rates unchanged last week, though it kept the door open for potential rate hikes due to ongoing uncertainty surrounding the US-Iran conflict. Despite the pause, money markets continue to price in a 25-basis-point rate increase by the end of the year, according to Prime Terminal data.
BoE tone softens as Bailey downplays urgency on next hike
Analysts at Scotiabank characterize the latest BoE decision as signaling "softened hawkishness," noting that Governor Andrew Bailey "played down the urgency around timing of the next rate hike" even as the MPC delivered a 6–3 vote to hold rates, with three policymakers calling for a "25bpt increase." This combination of a split vote and more cautious guidance reinforces the impression of a central bank that remains alert to inflation risks but is in no rush to tighten policy aggressively.
China's RatingDog Manufacturing Purchasing Managers' Index (PMI) eased to 50.9 in July from 51.7 in June the latest data published by RatingDog showed on Monday. The market forecast was for a 51.5 reading.
Market reaction to China’s RatingDog Manufacturing PMI
The China-proxy Australian Dollar (AUD) has little to no impact following China’s PMI data. At the press time, the AUD/USD pair is up 0.18% on the day to trade at 0.7035.
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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