AUD/USD rose to 0.6255 on Tuesday, extending Monday's rebound. Earlier, US President Trump announced new tariffs on China and then postponed tariffs on Canada and Mexico, which eased trade war concerns.
Meanwhile, aggressive bets on a February rate cut by the Reserve Bank of Australia (RBA) and concerns about a slowdown in China's economy continued to weigh on the Australian dollar.
AUD/USD edged up to 0.6255 on Tuesday, moving in a narrow trading range between 0.6200 and 0.6300. The Relative Strength Index (RSI) is at 53, in positive territory and rising rapidly, indicating increased buying interest.
Meanwhile, the Moving Average Convergence/Divergence (MACD) histogram shows green bars, indicating that although bullish momentum is emerging, it is still restrained by market uncertainty. Support is firmly established around 0.6200 and resistance is around 0.6300, a breakout of either will determine the direction of the pair.
One of the most important factors affecting the Australian dollar (AUD) is the interest rate level set by the Reserve Bank of Australia (RBA). Since Australia is a resource-rich country, another key driver is the price of its largest export, iron ore. The health of the Chinese economy, as its largest trading partner, is a factor, as well as Australia's inflation, economic growth rate, and trade balance. Market sentiment is also a factor, i.e. whether investors are buying riskier assets (risk-on appetite) or seeking to avoid risk (risk-off appetite), with risk-on appetite being positive for the AUD.
The Reserve Bank of Australia (RBA) influences the Australian dollar (AUD) by setting the interest rate level at which Australian banks lend to each other. This affects the level of interest rates across the economy. The RBA's main goal is to maintain a stable inflation rate of 2-3% by raising or lowering interest rates. Relatively high interest rates support the AUD compared to other major central banks, while relatively low interest rates support the AUD. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter being positive for the AUD.
China is Australia's largest trading partner, so the health of the Chinese economy has a significant impact on the value of the Australian dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods, and services from Australia, which boosts demand for the Australian dollar and pushes up its value. The opposite is true when the Chinese economy is not growing as fast as expected. Therefore, positive or negative surprises in Chinese economic growth data usually have a direct impact on the Australian dollar and its currency pairs.
Iron ore is Australia's largest export, with annual exports of $118 billion based on 2021 data, and China is its main export destination. Therefore, iron ore prices can be a driver of the Australian dollar. Generally speaking, if iron ore prices rise, the Australian dollar will also rise because the total demand for the Australian dollar will increase. If iron ore prices fall, the opposite is true. Higher iron ore prices also tend to lead to a greater likelihood of Australia having a trade surplus, which is also positive for the Australian dollar.
The trade balance, the difference between what a country earns from exports and what it earns from imports, is another factor that affects the value of the Australian dollar. If Australia produces popular exports, its currency will gain value purely from the surplus demand created by foreign buyers seeking to buy its exports, rather than spending on imports. Therefore, a positive net trade balance strengthens the Australian dollar, while a negative trade balance has the opposite effect.