The AUD/USD pair remained under pressure for the second consecutive day on Wednesday and continued losing ground with the AUD dropping to a near two-month low against the USD.
The risk-off market sentiment, China’s economic woes and the RBA’s decision to keep rates on hold have weighed heavily on the Aussie. Additionally, the AUD has weakened further following the release of strong US labour data for July. ADP Employment Change rose by 324K, beating the 189K estimate. Australia’s largest export Iron Ore is also in decline, further impacting the Australian dollar.
Key factors impacting the AUD
One of the key factors that affect the Australian dollar is the level of interest rates set by the Reserve Bank of Australia (RBA), the price of its biggest export, Iron Ore, the health of the Chinese economy, which is its largest trading partner, Australian inflation, Australia’s growth rate and Trade Balance. Market sentiment is also a factor and the AUD tends to rise when investors take on risky assets (risk-on) and tends to fall when investors avoid risky assets and turn to safe-havens (risk-off).
US private payrolls data
The US workforce in July has expanded more than expected. According to payroll processor ADP, there was a surprising rise of 324K jobs in July versus the 189K forecast by economists. The data exemplifies a solid US labour market with inflation remaining persistently high and keeps the door for another 25 bps rate hike in September or November open. The Federal Reserve is expected to maintain interest rates higher for longer which will support the greenback and attract greater foreign capital inflows.
The global risk sentiment turned sour after Fitch downgraded the US Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’, due to fiscal deterioration over the next three years. The market mood was also gloomy after data from China showed that business activity in the manufacturing sector contracted in July, with the Caixin Manufacturing PMI dropping from 50.5 in June to 49.2 in July.
RBA keeps policy rate unchanged
The Reserve Bank of Australia’s (RBA) surprise decision to keep rates unchanged for the second meeting in a row has weakened the Australian dollar. The RBA left the policy rate at 4.1% on Tuesday morning, against the market expectation for a 25 basis points hike. In the policy statement, the RBA explained that the decision to hold rates unchanged would offer them room to assess the economic outlook and the impact policy tightening has had on the Australian economy. However, they noted that “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”
Market participants and investors will also check the broader risk sentiment to decide on whether to pursue short-term opportunities around the risk-sensitive Aussie. The focus now, however, remains on the release of the US monthly employment details, the popular NFP report, which is due out on Friday.