Australian Dollar advances as Unemployment Rate comes below forecasts

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Australian Dollar (AUD) inches higher against the US Dollar (USD) following the release of mixed employment data from Australia on Thursday.

Australian Dollar rises as January Unemployment Rate holds at 4.1%, coming in below 4.2% expectations.
Australia’s Employment Change rose 17.8K in January, down from 68.5K and below the 20.0K forecast.
US Dollar strengthened after hawkish FOMC Meeting Minutes revived rate hike speculation amid persistent inflation.

Australian Dollar (AUD) inches higher against the US Dollar (USD) following the release of mixed employment data from Australia on Thursday. The AUD/USD pair is trading modestly higher after Australia’s seasonally adjusted Unemployment Rate held steady at 4.1% in January, against market expectations of 4.2%.

The Australian Bureau of Statistics (ABS) reported that Employment Change rose by 17.8K in January, easing from a revised 68.5K in December (revised from 65.2K) and below the 20.0K consensus forecast. The Participation Rate remained unchanged at 66.7%, while Full-Time Employment increased by 50.5K, compared with a revised 56.8K gain in the prior month (revised from 54.8K).

The AUD may find support amid cautious sentiment around the Reserve Bank of Australia (RBA) policy outlook. The latest RBA Meeting Minutes indicated that February’s rate hike was driven by stronger-than-expected economic data, persistent broad-based inflation, and easing financial conditions. Policymakers agreed that without further action, inflation would likely remain above target for a prolonged period. Earlier, RBA Governor Michele Bullock signaled that a renewed pickup in inflation left the central bank with limited options other than tightening policy further.

However, the AUD/USD pair came under pressure in the previous session as the US Dollar strengthened following hawkish minutes from the Federal Open Market Committee (FOMC), which reignited speculation about potential rate hikes if inflation stays elevated. FOMC Meeting Minutes from the January meeting showed that nearly all participants supported keeping rates unchanged, with only a few favoring a cut. Still, officials left the door open to further easing should inflation moderate in line with expectations.

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.