The Australian dollar (AUD) has been performing well, up almost 0.3% and hovering around 0.7150, inching closer to 0.7200. Interestingly, this uptick isn’t really due to strong local economic data—Tuesday’s numbers were rather disappointing. It seems the boost comes more from trends in Beijing and the commodities market than from Australia’s own economic indicators.
Homefront isn’t pretty
In April, building permits dropped by 3.4% month-on-month, which wasn’t what analysts were predicting; they expected a smaller decline of 1.5%. Additionally, our first quarter gross operating profit decreased by 1.3%, quite the contrast to the anticipated 0.5% rise. The current account deficit hit over A$27 billion, exceeding expectations of A$23 billion. None of this paints a favorable picture for a leading currency. Usually, these figures would put the Australians at a disadvantage.
China steps up
The situation is somewhat balanced out by developments in China. A report from RatingDog indicated that China’s Manufacturing Purchasing Managers Index (PMI) for May came in at 51.8—down from April’s five-year high of 52.2 but still better than the expected 51.4. This highlights why Australia remains a key player benefiting from China’s growth, even if local data is underwhelming. The National Bureau of Statistics’ manufacturing PMI for May met expectations at 50.0, below April’s mark of 50.3, indicating that the large state-run factories are neither expanding nor contracting. It’s smaller private firms that fuel Australia’s exports. Iron ore, a major export, remains strong at over US$109 per tonne—well above the US$90-100 range many analysts projected for the year, which helps bolster the Aussie dollar despite weak domestic figures.
Market seems optimistic
Interest rates are another significant factor, particularly as they may be reassessed. The Reserve Bank of Australia (RBA) has raised the cash rate three times this year, bringing it to 4.35%, which is comfortably higher than the Federal Reserve’s target. Now, there’s about an 80% chance of an additional 25 basis points increase to 4.60% by August. This bullish stance is somewhat expected, so much of the positive news is already priced in. There’s also the positioning issue, as speculative net long positions for the Australian dollar have reached extremes over recent years. It’s similar to a crowd that might panic with even a minor upset, akin to what happened earlier in 2025. This is occurring while the dollar index remains buoyant amid safe-haven assets, with the U.S. dollar holding up against rising tensions between the U.S. and Iran and increasing oil prices. Australia is appealing to investors primarily due to interest rate narratives, but this could shift quickly.
The indicators tell a story
On the daily charts, the AUD is staying above the 50-day exponential moving average (EMA) around 0.7150, and well above the 200-day EMA at 0.6900. This indicates that the upward trend from April’s lows remains intact, although momentum is shaky. Despite the upward price movement, the daily Stochastic Relative Strength Index (Stoch RSI) has dipped into the mid-20s, with the 5-minute Stoch RSI nearing overbought territory after a recent rebound. As long as the AUD holds above 0.7150—and that also aligns with the rising 50 EMA—the outlook is still constructive. A breakthrough above 0.7200 could lead to significant resistance around 0.7250, opening doors to late May highs near 0.7300. If it drops below 0.7150, the attention would shift to the 0.7100 mark. Given the longevity of the commodity and carry rally, it’s more about what’s happening in China than local economic indicators.
Challenges ahead
An important event is set for 1:30 a.m. GMT on Wednesday when Australia releases its first quarter gross domestic product (GDP) figures. The consensus expects a growth of 0.5% quarter-on-quarter and 2.7% year-over-year, a slight decrease from the previous 0.8% growth. The RBA’s hawkish approach is largely influenced by inflation, currently near 3.8%, not by growth outcomes. So, if GDP data turns out weak, the bank might tighten in response to an economic slowdown, impacting the carry trade as it aligns with interest rate movements. RBA Governor Bullock will also be speaking at 05:00 GMT on Thursday, and any indication that she is weighing stagnant inflation against weak economic growth will carry significant weight, perhaps more than today’s trading. The S&P Global and Ai Group survey results, which come out later, are secondary in importance.
