AUD/USD gains traction near 0.6380 during the early Asian session on Monday. The lift is coupled with a weaker US Dollar, as traders await the PBoC’s interest rate decision later on Monday, with no expected change.
The Australian Dollar rises against the US Dollar following US President Donald Trump’s tariff exemption announcement on key technology products. The exemption benefits products manufactured in China, Australia’s top trade partner.
Uncertainty Around Rba Rate Cut Timing
Uncertainty surrounds the timing of the Reserve Bank of Australia’s (RBA) next rate cut amidst ongoing trade tariff risks. Markets anticipate a 25 basis points cut in May and around 120 bps of total easing over the year.
The People’s Bank of China is expected to leave its benchmark lending rates unchanged but more stimulus might be introduced soon considering the escalating trade tensions. Factors like interest rates, iron ore prices, and China’s economic health significantly impact the Australian Dollar.
Iron Ore is Australia’s largest export to China, heavily influencing the AUD’s value. Increased iron ore prices lift demand for the AUD, benefiting its trade balance. A positive Trade Balance, where export income exceeds import expenses, strengthens the Australian Dollar.
Putting it plainly, the Australian Dollar is catching some wind at the start of the week, nudging upwards toward the 0.6380 mark. This is happening while the US Dollar shows a touch of weakness – not exactly a collapse, but enough of a retreat to support the recent uptick. We’re watching closely as traders shift attention to what the People’s Bank of China decides with interest rates later today. Now, no one’s expecting a change, but even keeping rates on hold says something—especially when larger moves could still be on the cards soon to address growing pressure from global trade conditions.
Now, looking at what Trump outlined regarding tariff exemptions, there’s a clear tailwind here. By removing certain tariffs on Chinese tech goods, there’s a knock-on effect benefitting Australia, since China remains the country’s most important trading partner by a wide margin. That exemption decision effectively puts less strain on Chinese output in tech, which in turn can indirectly prop up demand for Australian exports that support production, such as raw materials.
Potential Support From Beijing
As far as local policy goes, the Reserve Bank of Australia continues to walk a rather fine line. The timing of their next rate reduction isn’t nailed down yet, but market participants aren’t just guessing in the dark either. There’s already priced-in expectation for a 25bps cut in May. On top of that, we’re seeing a full 120bps reduction projected for the next 12 months. That’s a substantial easing cycle already anticipated, which brings certain implications for how markets may position.
There’s cautious optimism about potential support coming from Beijing, too. If the PBoC opts to leave interest rates steady today, it’s not the final word—far from it. Additional easing or fiscal measures may surface soon if trade and industrial numbers continue to show strain. The pressure points here are visible, particularly with cross-border trade flows under tension.
What’s essential in shaping the direction of the Australian Dollar from here includes three main gears working together: domestic interest rates, global risk appetite (especially around commodities like iron ore), and the pulse of demand from China. Iron ore, being Australia’s largest export, can’t be ignored for its outsized influence on the AUD. The story is simple but powerful—if iron ore prices climb due to stronger Chinese demand or supply constraints, markets start buying Australian Dollars. It’s not purely sentiment; it’s about expected earnings and trade balance strength.
On the trade balance front, the mechanism remains straightforward. When Australia exports more than it imports, foreign buyers must acquire more AUD, supporting the currency’s demand. This improved flow cushions against downside pressure even when global risk sentiment dips. And as iron ore contracts are largely priced in US Dollars, a weaker US currency can enhance Australian terms of trade further, especially when paired with rising raw material prices.
In our view, traders setting positions around AUD/USD need to weigh the short-term uplift on policy expectations out of China against the medium-term rate path already baked into RBA forecasts. The balance of risk tilts on data yet to come—particularly readings out of China—and with trade dynamics shifting due to renewed US policy turns, pricing will likely stay reactive.
