China’s May retail sales rose 3.7%, industrial production rose 5.6%

One of the most important 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 major driver is the price of its largest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and trade balance. Market sentiment – ​​whether investors are taking on riskier assets (risk-on) or seeking safe havens (risk-off) – is also a factor, with risk positive for the 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 affects the level of interest rates in the economy as a whole. The main aim of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates relative to other major central banks support the AUD and vice versa for relatively low ones. 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 has a major impact on the value of the Australian dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, increasing demand for the AUD and increasing its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian dollar and its pairs.

Ferrous iron is Australia’s largest export, at $118 billion a year according to 2021 data, with China as its main destination. Therefore, the iron ore price could be a boost to the Australian dollar. Generally, if the price of iron ore rises, the AUD also rises, as aggregate demand for the currency rises. The opposite happens 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 for 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 affect the value of the Australian dollar. If Australia produces highly demanded exports, then its currency will gain value simply from the excess demand created by foreign buyers looking to buy its exports versus what it spends to buy imports. A positive net trade balance therefore strengthens the AUD, with the opposite effect if the trade balance is negative.