Australian Dollar declines to near 10-month lows
- AUD/USD falls as US Dollar gains on hawkish Fed commentary boost December Fed rate hike bets.
- Australia’s Consumer Inflation Expectations remain steady at 5.3% in November, remaining at their highest level since June.
- The Australian Dollar struggles as the RBA is expected to hold interest rates steady for the foreseeable future.
AUD/USD loses ground for the third consecutive day, trading around 0.6840 during Asian hours on Thursday. The pair falls to nearly 10-month lows as the US Dollar (USD) receives support from an increasingly hawkish Federal Reserve (Fed) policy outlook.
Following hotter-than-expected US Consumer Price Index (CPI) inflation data, traders have ramped up bets on a December rate hike, especially after Fed Governor Christopher Waller noted earlier this week that he would back a quarter-point increase, or even a half-point move if inflation worsens. According to the CME FedWatch Tool, markets are now pricing in around 87% probability of a December rate hike, alongside a nearly 13% chance of a larger 50 basis point increase.
Australia’s Consumer Inflation Expectations held steady at 5.3% in November, matching the previous month's reading and remaining at their highest level since June. These elevated expectations follow September's headline inflation data, which accelerated to a six-month high of 4.3% and remains well above the Reserve Bank of Australia’s (RBA) 2–3% target range.
Despite persistent price pressures, the Australian Dollar (AUD) faces headwinds amid growing market speculation that the RBA has reached the end of its tightening cycle and will hold interest rates steady for the foreseeable future. Looking further ahead, Prime Terminal data indicates that markets are pricing in roughly 28 basis points of RBA rate cuts in 2027.
Bond yield surge weighs on leveraged housing markets in Australia
Strategists at Societe Generale warn that the latest upswing in global bond yields is beginning to bite in interest‑sensitive sectors, noting that “the rise in bond yields, however, is feeding through to leveraged housing markets, and Australia is certainly one of them.” This reinforces concerns that Australia’s highly indebted households and housing market are particularly exposed as funding costs move higher.
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.
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