Australian Dollar decline takes it close to 10-month lows

AUD/USD retreats as hawkish Fed remarks lift December rate hike expectations and strengthen the US Dollar.
Still at their highest since June, Australia’s Consumer Inflation Expectations hold at 5.3% in November.
Expectations of unchanged RBA interest rates for the foreseeable future keep the Australian Dollar under pressure.

Pressure on AUD/USD persists as an increasingly hawkish Federal Reserve (Fed) policy outlook supports the US Dollar (USD), pushing the pair towards nearly 10-month lows. During Asian trading on Thursday, the pair is around 0.6840, extending its decline into a third consecutive day.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Bets on a December rate hike have strengthened following US Consumer Price Index (CPI) inflation figures that exceeded expectations. Adding to those expectations, Fed Governor Christopher Waller said earlier this week that he would support a quarter-point increase, or even a half-point rise if inflation deteriorates. The CME FedWatch Tool now puts the market-implied probability of a December rate hike at around 87%, alongside a nearly 13% chance of a larger 50 basis point increase.

At 5.3% in November, Australia’s Consumer Inflation Expectations were unchanged from the previous month and continued to stand at their highest since June. The elevated reading comes after headline inflation accelerated to a six-month high of 4.3% in September, remaining well above the Reserve Bank of Australia’s (RBA) 2–3% target range.

The Australian Dollar (AUD) remains under pressure despite continuing price pressures, as markets increasingly speculate that the RBA’s tightening cycle is over and interest rates will stay unchanged for the foreseeable future. Further out, markets are factoring in roughly 28 basis points of RBA rate cuts in 2027, according to Prime Terminal data.

How is the bond yield surge weighing on Australia’s leveraged housing markets?

Interest-sensitive sectors are starting to feel the effects of the recent rise in global bond yields, Societe Generale strategists warn. They note that “the rise in bond yields, however, is feeding through to leveraged housing markets, and Australia is certainly one of them.” Their assessment adds to concerns over the particular vulnerability of Australia’s heavily indebted households and housing market to rising funding costs.

Australian Dollar: Common Questions

Which factors matter most for the Australian Dollar?

Interest rates set by the Reserve Bank of Australia (RBA) are among the strongest influences on the Australian Dollar (AUD). Australia’s resource-rich economy also makes the price of iron ore, its largest export, an important driver. Other influences include economic conditions in China, Australia’s biggest trading partner, as well as domestic inflation, economic growth and the trade balance. Investor sentiment matters too: a shift towards riskier assets, known as risk-on, supports the AUD, while a preference for safe havens is described as risk-off.

Through which channels do Reserve Bank of Australia decisions affect the Australian Dollar?

By setting the interest rates at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) influences borrowing costs across the economy and, in turn, the Australian Dollar (AUD). Its primary objective is to keep inflation stable at 2-3%, raising or lowering interest rates to achieve this. Rates that are relatively high compared with those set by other major central banks support the AUD; relatively low rates have the reverse effect. Quantitative easing and quantitative tightening offer the RBA additional ways to influence credit conditions. Easing is negative for the AUD, while tightening is positive.

Why does the Chinese Economy matter for the Australian Dollar?

As Australia’s largest trading partner, China has a substantial influence on the value of the Australian Dollar (AUD) through its economic performance. A strong Chinese economy buys more Australian raw materials, goods and services, increasing demand for the AUD and lifting its value. When Chinese growth falls short of expectations, the reverse occurs. Surprises in Chinese growth figures, whether positive or negative, therefore often feed directly into the Australian Dollar and its currency pairs.

Why do Iron Ore prices influence the Australian Dollar?

With annual exports worth $118 billion according to 2021 data, iron ore is Australia’s biggest export, and China is its main destination. This makes iron ore prices a potential driver of the Australian Dollar. Rising prices generally increase overall demand for the currency and lift the AUD, while falling prices have the reverse effect. Higher iron ore prices also tend to improve the likelihood of a positive Australian trade balance, providing further support for the AUD.

Why is the Trade Balance important for the Australian Dollar?

Another influence on the Australian Dollar is the trade balance, calculated as export earnings minus import payments. Strong overseas demand for Australian exports can lift the currency when purchases by foreign buyers generate more demand for it than is offset by Australia’s spending on imports. A positive net trade balance therefore strengthens the AUD, whereas a negative balance has the opposite effect.