Australian Dollar strengthens on hawkish RBA comments
- RBA Governor Bullock warned that persistent inflation may force another interest rate hike in September.
- UBS projects two additional Australian rate hikes, forecasting a terminal interest rate of 4.85%.
- Traders are pricing in an October Fed rate hike probability of 53.1%.
AUD/USD extends its gains for the second successive day, trading around 0.7120 during the Asian hours on Friday. The currency pair is appreciating as the Australian Dollar (AUD) strengthens following hawkish comments from Reserve Bank of Australia (RBA) Governor Michele Bullock.
Speaking at a parliamentary hearing on Friday, Bullock highlighted that the central bank's inflation concerns have materialized, potentially forcing another interest rate increase. Her statements reinforced market expectations for a fourth rate hike this year at the RBA's late-September meeting. Deputy Governor Andrew Hauser affirmed the Board's total commitment to its inflation target, while analysts at UBS now project two additional hikes, bringing the terminal rate to 4.85%.
However, strategists at UOB Group maintain a bearish medium-term bias on the Aussie, noting that they “turned negative on AUD last Friday (11 Sep, spot at 0.7160)” and initially flagged that the currency “could decline toward 0.7120.” They point out that after AUD/USD broke below 0.7120 and fell to 0.7109, they cautioned on 15 September that “while further weakness is not ruled out, short-term conditions are oversold, and AUD must close below 0.7100 before a move to 0.7050 can be expected.” With the pair having “broken below 0.7100 and closed at 0.7087 (-0.64%)” yesterday, UOB now “expects AUD to drop to 0.7050,” adding that “only a breach of 0.7140 (‘strong resistance’ level previously at 0.7175) would mean that AUD is stabilising.”
The US Federal Reserve raised interest rates by a quarter-point on Wednesday, marking its first rate hike since 2023. Federal Reserve Chair Kevin Warsh stated that inflation remains too high for too long, noting that recent summer readings fail to show meaningful improvement in underlying trends. Following these remarks, the CME FedWatch tool indicates that traders are now pricing in a 53.1% probability of another US rate hike at the Fed's upcoming October meeting, up from 44% a day earlier.
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.