AUD/USD weakens below 0.6750 as China’s stimulus update disappoints markets

• AUD/USD edges lower to around 0.6740 in Wednesday’s Asian session. 
• Firmer USD and lack of more Chinese major stimulus weigh on the pair. 
• The FOMC Minutes will be closely watched on Wednesday. 

The AUD/USD pair extends its decline to near 0.6740 during the Asian session on Wednesday. The stronger US Dollar (USD) and disappointment over additional China stimulus measures continue to undermine the pair.

According to the RBA September Meeting Minutes released on Tuesday, the board members discussed scenarios for lowering and raising interest rates in the future. RBI Deputy Governor Andrew Hauser said the Australian central bank will act when inflation stops being high and sticky, adding that lowering inflation is a significant task and they are not completed yet.

The comments from the National Development and Reform Commission press conference exert some selling pressure on the China-proxy Australian Dollar (AUD). Chinese officials disappoint traders without more major stimulus. 

On the other hand, traders reduce their bets on the Federal Reserve (Fed) rate cut in September, which lifts the USD broadly. According to the CME FedWatch Tool, the markets have priced in nearly an 87% chance of 25 basis points (bps) Fed rate cuts in November, up from 31.1% last week. 

Fed Vice Chair Philip Jefferson said on Tuesday the US central bank's 50 bps interest-rate cut in September was aimed at keeping the labor market strong even as inflation continues to ease. 

Looking ahead, investors await the Federal Open Market Committee (FOMC) Minutes. The attention will shift to the US Consumer Price Index (CPI) for September on Thursday. However, if the inflation report shows softer than expected outcome, it could drag the Greenback lower and create a tailwind for AUD/USD.

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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