Australian Dollar edges lower ahead of Trade Balance data

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AUD/USD inches lower after two days of gains, trading around 0.7230 during the Asian hours on Thursday. However, the Australian Dollar (AUD) may gain ground against the US Dollar (USD) amid hopes that the US and Iran were moving closer to an agreement to end the war.

AUD/USD may rebound as easing US-Iran tensions weaken safe-haven demand for the US Dollar.
Iran said a US proposal to end the war remains under consideration after reports of a possible agreement.
The US Dollar may weaken as easing inflation pressures strengthen expectations for Fed interest rate cuts.

The BBC reported on Wednesday that Iran said a US proposal to end the war is "still being considered" after reports that the two countries could be close to an agreement. The US has presented a one-page memorandum of understanding to Iran that would gradually reopen the Strait of Hormuz and lift the American blockade on Iranian ports. Detailed talks over Iran’s nuclear program would come later in the process, the person said, adding that nothing has yet been agreed upon.

CNBC reported on Wednesday that US President Donald Trump said that Iran will be bombed “at a much higher level” if it doesn’t agree to a peace deal. Trump in a Truth Social post said the US military offensive known as Operation Epic Fury “will be at an end” if Iran “agrees to give what has been agreed to, which is, perhaps, a big assumption.”

The US Dollar could face challenges as easing concerns over price pressures could convince the US Federal Reserve (Fed) to cut the interest rate rather than keep policy restrictive for longer.

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.