Australian Dollar rises as markets price in March RBA rate hike

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AUD/USD gains ground after registering over 1% losses in the previous session, trading around 0.7090 during the Asian hours on Friday. The Australian Dollar (AUD) finds support against the US Dollar (USD) amid hawkish expectations surrounding the Reserve Bank of Australia (RBA) policy outlook.

Australian Dollar advances as markets expect the RBA to increase interest rates in March.
A Reuters poll shows 23 of 30 economists expect the RBA to raise the cash rate to 4.10% on March 17.
January’s US Personal Consumption Expenditures Price Index will be eyed later on Friday.

A Reuters poll released Friday showed that 23 of 30 economists expect the RBA to raise the Official Cash Rate (OCR) to 4.10% on March 17, while seven anticipate no change. The latest survey represents a shift from February’s poll, which projected the rate would remain at 3.85%. The median forecast now sees the cash rate reaching 4.35% by the end of 2026.

Francesco Pesole of ING identifies the Australian Dollar as one of the top-performing G10 currencies, supported by firm expectations of further RBA tightening and elevated Oil prices. Markets currently price in a 70% probability of a 25-basis-point rate hike next week, with AUD/USD potentially targeting 0.7200 if equity markets remain stable. However, stretched positioning increases the risk of a correction following the policy decision.

ING’s Pesole noted that equity market instability remains a key downside risk for the Australian Dollar, while markets are increasingly aggressive in pricing another RBA rate hike on March 17. The implied probability of a 25-basis-point increase has climbed to 70% in the Cash Rate futures market, with economist consensus also shifting toward a tightening move.

Meanwhile, traders are preparing for another key US inflation release. January’s Personal Consumption Expenditures Price Index (PCE), the Federal Reserve’s preferred inflation gauge, is due later in the day, although it will not reflect the impact of the Iran war. Additional US data scheduled for release includes the first revision of fourth-quarter GDP growth and March consumer confidence.

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.

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