AUD/USD weakens below 0.6750 ahead of RBA’s Bullock speech

• AUD/USD trades on a weaker note near 0.6720 in Thursday’s early Asian session. 
• The weaker US Job Openings data suggested continued cooling in the US job market, undermining the USD. 
• Traders will monitor the RBA’s Bullock speech ahead of US ISM Services PMI on Thursday. 

The AUD/USD pair softens around 0.6720 during the early Asian session on Thursday. The pair trades in a volatile session amid Chinese economic concern and the weaker US Dollar (USD). Traders will take more cues from the Reserve Bank of Australia's (RBA) Michele Bullock's speech ahead of the US ISM Services PMI, which is due later on Thursday. 

The weaker-than-expected US JOLT Job Openings for July signaled further cooling in the US labor market, triggering the expectation of a potential 50 basis points (bps) rate cut by the US Federal Reserve (Fed) in September. This, in turn, might weigh on the USD against the Australian Dollar (AUD). Traders will keep an eye on the US August Nonfarm Payrolls (NFP) for August on Friday.  Goldman Sachs analysts noted, “A market correction may start to get traction if payrolls are weak on Friday.”

On the Aussie front, Australia’s Gross Domestic Product (GDP) growth grew by just 0.2% in the April-June period and 1% over the last year, the Australian Bureau of Statistics reported on Wednesday. The report indicated that the Australian economy registered its worst performance in more than 30 years, excluding the first year of the COVID-19 pandemic.

Additionally, the fear of a Chinese economic slowdown might contribute to the AUD’s downside as China is a major trading partner to Australia. Chinese Caixin Manufacturing PMI rose to 50.4 in August from 49.8 in July, below the estimation of 52.2. 

Traders await the RBA’s Bullock speech on Thursday for more insight about the economic and interest rate outlook. Any hawkish comments from Bullock could lift the Aussie and cap the pair’s downside. 

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact 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 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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.