The AUD/USD price is attracting some sellers near 0.6685 during the early Asian session on Monday. A new rise in geopolitical risks following the US arrest of Venezuelan President Nicolas Maduro has strengthened safe-haven currencies such as the US dollar (USD) against the Australian dollar (AUD). Later on Monday, traders will watch the release of China’s RatingDog Services PMI and US ISM Manufacturing PMI data.
US President Donald Trump confirmed the arrest of Venezuelan President Nicolas Maduro and his wife, saying, “Maduro and his wife will face American justice,” adding that the United States will administer Venezuela until they can have a safe, sound, and wise transition.
Just hours after the Venezuelan leader’s arrest, Trump said US oil companies were willing to spend billions to restore crude oil production in Venezuela, something that could give a boost to global growth as increased supply drives down energy prices. Geopolitical risks and uncertainty could boost safe haven flows, supporting the dollar and creating headwinds for the pair in the near term.
On the other hand, hopes of the Reserve Bank of Australia (RBA) may help limit the Australian dollar’s losses. RBA Governor Michael Bullock’s hawkish comments after the December monetary policy decision showed that policymakers’ concerns about inflation had taken center stage, and that the possibility of a rate hike was on the table last month.
Frequently asked questions about the Australian dollar
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). Because Australia is a resource-rich country, another major driver is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is one factor, in addition to Australia’s inflation, its growth rate and its trade balance. Market sentiment – whether investors are snapping up riskier assets (risk on) or looking for safe havens (risk off) – is also a factor, with risk appetite positive for 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 affects the level of interest rates in the economy as a whole. The RBA’s main objective 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 Australian dollar, and 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 major impact on the value of the Australian Dollar (AUD). When the Chinese economy is performing well, it buys more raw materials, goods and services from Australia, which raises demand for the Australian dollar, raising its value. The opposite is the case when the Chinese economy does not grow as quickly as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian dollar and its crosses.
Iron ore is Australia’s largest export, representing $118 billion annually according to 2021 data, and China is its main destination. Therefore, the price of iron ore could be a driver of the Australian dollar. In general, if the price of iron ore rises, the Australian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of iron ore falls. Higher iron ore prices also tend to increase the likelihood of a positive trade balance for Australia, which is also positive for the Australian dollar.
The balance of trade, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can affect the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will gain value from the excess demand generated by foreign buyers seeking to buy its exports in exchange for what it spends to buy imports. Therefore, a positive net trade balance strengthens the Australian dollar, with the opposite effect if the trade balance is negative.
