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AUD/USD recovers intraday losses as US dollar falls ahead of US labor market test

Posted on by Vaseline
AUD/USD recovers intraday losses as US dollar falls ahead of US labor market test

  • AUD/USD recovers as US dollar corrects, with US NFP data taking centre stage.
  • U.S. employers are expected to have posted 8.1 million new job openings in July.
  • The Australian economy is expected to grow at an annual rate of 1%.

The AUD/USD pair is bouncing back, recovering intraday losses after posting a fresh two-week low slightly below the crucial support of 0.6700 in the European session on Wednesday. The Australian asset is rebounding while the US dollar (USD) is correcting moderately after posting a fresh two-week high. The US dollar index (DXY), which tracks the greenback’s value against six major currencies, is down from recent highs of 102.00 to near 101.60.

Market sentiment remains risk-off as investors are cautious ahead of U.S. Nonfarm Payrolls (NFP) data for August, due out Friday. S&P 500 futures are extending Tuesday’s decline, showing a decline in investor risk appetite.

Investors are eagerly awaiting U.S. labor market data as it will inform the Federal Reserve’s (Fed) rate cut for its September meeting. The labor market has become more important as Fed Chairman Jerome Powell’s comments at the Jackson Hole (JH) Symposium indicated the central bank is focused on preventing job losses as price pressures are on track to sustainably return to the bank’s 2% target.

The U.S. dollar will be guided by the JOLTS Job Openings data for July, due at 14:00 GMT. Economists expect U.S. employers to have posted 8.1 million new job openings, down slightly from 8.184 million in June.

On the Aussie front, the Australian dollar (AUD) is recovering losses caused by mixed Q2 gross domestic product (GDP) data. The report showed the economy grew steadily at 0.2%, slower than the 0.3% estimate. Annualised GDP grew in line with expectations at 1%, slower than the previous reading of 1.3%, revised upwards from 1.1%.

Looking ahead, investors will be focused on Reserve Bank of Australia (RBA) Governor Michele Bullock’s speech on Thursday. Investors will be looking for fresh signals on whether the RBA will move towards policy normalisation this year.

Frequently Asked Questions about the Australian Dollar

One of the most important factors for the Australian dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another important factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is Australia’s inflation, its growth rate and trade balance. Market sentiment – ​​whether investors are taking on riskier assets (risk-on) or seeking safe havens (risk-off) – is also a factor, with risk-on being positive for the AUD.

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 RBA’s main goal is to maintain a stable inflation rate of 2-3% by moving interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD negative and the latter being AUD positive.

China is Australia’s largest trading partner, so the health of the Chinese economy has a major impact on the value of the Australian dollar (AUD). When the Chinese economy is doing well, it buys more commodities, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite is true when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth figures therefore often have a direct impact on the Australian dollar and its pairs.

Iron ore is Australia’s largest export, worth $118 billion per year according to 2021 data, with China as the primary destination. The price of iron ore can therefore be a driver of the Australian dollar. In general, when the price of iron ore rises, the AUD will also rise, as aggregate demand for the currency increases. The opposite is true when the price of iron ore falls. Higher iron ore prices also result in a greater chance of a positive trade balance for Australia, which is also positive for the AUD.

The trade balance, the difference between what a country earns on its exports and what it pays for its imports, is another factor that can affect the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will only appreciate because of the excess demand created by foreign buyers wanting to buy its exports, compared to what it spends on imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.

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