- In early Asian trading on Monday, AUD/USD weakened to around 0.6145.
- U.S. nonfarm payrolls increased by 256,000 in December. The unemployment rate fell to 4.1%.
- Concerns about China's economic downturn are weighing on Australia.
Early in Monday's Asian session, the AUD/USD pair remained defensive around 0.6145. US job growth in December was better than expected, broadly supporting the US dollar (USD).
Nonfarm payrolls (NFP) increased by 2.5 million in December, compared with an increase of 212,000 in November (revised from 227,000), according to data released Friday by the U.S. Bureau of Labor Statistics (BLS). The number increased by 6,000. This figure was significantly higher than the market estimate of 160,000.
Meanwhile, the unemployment rate fell to 4.1% in December from 4.2% in November. Finally, annual wage inflation, as measured by changes in average hourly wages, fell to 3.9% in December from 4% previously.
Strong US labor market data in December is likely to persuade the US Federal Reserve to keep interest rates on hold this month, which will support the Australian dollar (AUD). Financial markets expect the U.S. central bank to keep its benchmark overnight interest rate unchanged in the 4.25-4.50% range at its Jan. 28-29 meeting, according to the CME FedWatch tool. “It will take a very bad jobs report for the Fed to ease again by March, so the next rate cut will be in June, then the final rate cut in September,” said Michael Feroli, chief U.S. economist at JPMorgan. Deaf,” he said. .
Meanwhile, the Australian dollar remains under selling pressure against the US dollar, at its lowest level since April 2020. Slowing Chinese growth and deflation risks continue to weaken the Chinese proxy Australian dollar. Economists at Citi said China's GDP deflator is expected to be negative for the seventh consecutive time in the final quarter of last year.
Australian Dollar Frequently Asked Questions
One of the most important factors for the Australian dollar (AUD) is the interest rate level set by the Reserve Bank of Australia (RBA). Australia is a resource-rich country, so another important factor is the price of its largest export, iron ore, which is Australia's largest trading partner, as well as its inflation, growth rate and trade. The health of China's economy is also a factor. balance. Market sentiment is also a factor, with investors taking on riskier assets (risk-on) or seeking safer assets (risk-off), with risk-on being positive for the Australian dollar.
The Reserve Bank of Australia (RBA) influences the Australian dollar (AUD) by setting the level of interest rates at which Australian banks can lend to each other. This affects the level of interest rates throughout the economy. The RBA's main goal is to maintain a stable inflation rate of 2-3% by adjusting interest rates up and down. The Australian dollar is supported by relatively high interest rates compared to other major central banks, and conversely by relatively low interest rates. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD-negative and the latter AUD-positive.
China is Australia's largest trading partner, so the health of the Chinese economy has a significant impact on the value of the Australian dollar (AUD). When China's economy does well, China buys more raw materials, goods and services from Australia, increasing demand for the Australian dollar and boosting its value. The opposite is true if China's economy is not growing as fast as expected. Therefore, positive or negative surprises in China's growth data often directly impact the Australian dollar and its pairs.
Iron ore is Australia's largest export, accounting for $118 billion annually, according to 2021 data, with China the main destination. Therefore, iron ore prices could be a driver for the Australian dollar. Generally, when the price of iron ore rises, the Australian dollar also rises because aggregate demand for the currency increases. The opposite is true if the price of iron ore falls. Higher iron ore prices tend to increase the likelihood of Australia's trade balance being positive, which is also positive for the Australian dollar.
The balance of trade is the difference between what a country earns from exports and what it pays for imports, and is another factor that can affect the value of the Australian dollar. If Australia produces a highly sought-after export, the country's currency will be deducted from just the surplus demand generated from foreign buyers seeking to buy that export, compared to the amount spent on purchasing the import. value increases. Therefore, a positive net trade balance will cause the Australian dollar to appreciate, while a negative trade balance will have the opposite effect.
