Australian Dollar remains steady following RBA September Meeting Minutes
- RBA Minutes suggest that upside pressures are emerging from AI tech demand and rising oil prices amid Middle East conflict.
- Diverging RBA signals suggest policy is modestly to quite restrictive, with falling house prices indicating tighter conditions.
- US Dollar may gain ground due to safe-haven demand ahead of looming US inflation reports.
AUD/USD remains steady after experiencing volatility, hovering around 0.6960 during Asian hours on Tuesday. The pair moves little after the Reserve Bank of Australia (RBA) published the Minutes of its September monetary policy meeting.
RBA Meeting Minutes highlighted several emerging upside risks to inflation since August, accompanied by signals suggesting that financial conditions may only be modestly restrictive. Notably, signs of technology-driven price pressures stemming from the AI boom are beginning to surface in Australia. On the global front, the intensifying Middle East conflict has driven oil prices beyond expected levels, while a rise in the global neutral rate could put downward pressure on the Australian dollar if domestic rates remain unchanged.
While policy models indicate that monetary policy is somewhat restrictive and that the domestic neutral rate may have increased, a larger-than-expected decline in house prices hints that financial conditions could actually be quite tight. Additionally, board members cautioned that recent employment data should be interpreted with considerable care due to underlying survey modifications.
The AUD/USD pair may depreciate as the US Dollar (USD) could rebound amid increased safe-haven demand due to escalating Middle East tensions sparked by a deadly attack on Saudi Arabia’s Riyadh airport. The Saudi-led coalition fighting Yemen’s Iran-backed Houthis confirmed ongoing drone and missile strikes against Saudi target areas, while Yemen’s Armed Forces warned travelers that no Saudi airspace or airports, excluding Mecca and Medina, are safe. Meanwhile, traders continue to monitor potential supply developments, including prospects for increased Russian diesel supplies and a possible Russia-Ukraine energy ceasefire.
Traders largely expect the Federal Reserve to hold interest rates steady at its upcoming meeting while pricing in another rate hike for December. This follows the Fed’s September rate increase, which marked its first rate hike since 2023.
Investors are turning their attention to upcoming existing home sales data and scheduled remarks from Federal Reserve officials Christopher Waller, Tom Barkin, and Susan Collins. These updates come just ahead of Wednesday’s September inflation report, which is expected to play a crucial role in shaping the Fed’s next policy decision.
Societe Generale stays neutral on Dollar despite lopsided futures positioning
Strategists at Societe Generale highlight the extent of speculative bullishness on the Dollar, noting that “given how long the futures market is on dollars, this is impressive.” At the same time, they caution against reading too much into early-week moves, admitting they have “been warned time and again not to trust anything that happens on a Monday morning in the FX market.” Against that backdrop, Societe Generale’s bias is “to remain neutral today, while respecting the lopsided positioning,” preferring to acknowledge the crowded long-Dollar trade rather than chase it.
Australian Dollar FAQs
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.
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.
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.
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.
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.