Australian Judo Bank Manufacturing PMI eases to 48.2 in December, Services PMI slips to 50.4

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). As Australia is a resource-rich country, another key driver is the price of its biggest export, Iron Ore. Balance. Market sentiment – whether investors are taking ownership of riskier assets (risk on) or seeking safe havens (risk off) – is also a factor, with risk-forward positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the interest rates at which Australian banks can lend to each other. This affects the interest rate in the economy as a whole. The main aim of the RBA is to maintain a constant 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 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 pushing up its value. The opposite is true when China's economy is not growing as fast as expected. Positive or negative surprises in China's 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 the main destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. In general, if the price of Iron Ore rises, AUD will also rise, as overall demand for the currency rises. The reverse is true if the price of Iron Ore falls. Higher iron ore prices are also likely to lead to an increased likelihood of a positive Trade Balance for Australia, which is also bullish on the AUD.

The Trade Balance, which is the difference between what a country earns from its exports compared to what it pays for imports, is another factor that affects the value of the Australian Dollar. If Australia produces exports that are in high demand, its currency will only gain value from the additional demand created by foreign buyers who want to buy their exports. compared to what it costs to buy imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.