Key Moments
- AUD/USD trades near 0.7180, extending gains for a third straight session despite a 3.6% drop in Q2 Private Capital Expenditure.
- Hotter July inflation led major banks to forecast an RBA cash rate increase to 4.6%, with timing views split between September and November.
- Stronger US PCE data supports the US Dollar and limits additional upside for AUD/USD.
RBA Expectations Underpin AUD Strength
AUD/USD advanced for the third consecutive day, hovering around 0.7180 during Asian trading on Thursday. The currency pair continued to reflect a constructive tone as the Australian Dollar (AUD) held firm, even in the face of disappointing domestic data showing Private Capital Expenditure fell 3.6% in the second quarter. This contrasted with expectations for no change following a previous 6.5% increase.
The resilience of the AUD has been closely tied to rising expectations that the Reserve Bank of Australia (RBA) will deliver another interest rate hike. Those expectations intensified after a stronger-than-anticipated July inflation reading signaled ongoing price pressures, prompting financial institutions to adjust their policy outlooks.
National Australia Bank (NAB) now projects the RBA will lift its cash rate to 4.6% at the September meeting. Commonwealth Bank and ANZ see the move occurring in November, though both recognize there is a clear risk the central bank could act earlier. The RBA left its policy rate unchanged at 4.35% in August after three prior increases but emphasized that additional tightening remains a possibility if inflation risks rise further.
Growth Signals: Soft, Not Weak
BNY Mellon’s Geoff Yu highlighted that Australia’s Westpac–Melbourne Institute Leading Index showed a slight improvement in July, with the six‑month annualised growth rate rising to “-0.2% from -0.4% in June.” He observed that the index “remains below trend for a seventh straight month,” while emphasizing that the reading is now “only marginally negative,” suggesting the economy is “soft rather than outright weak.” This interpretation supports the notion that momentum has eased but has not deteriorated into pronounced weakness.
US Dollar Strength Caps AUD/USD Upside
Further gains in AUD/USD may be limited by ongoing support for the US Dollar (USD). Robust US economic data has reinforced market expectations that the Federal Reserve (Fed) will deliver at least one more interest rate increase before year-end.
In July, the US PCE price index rose 0.2% month-on-month, surpassing the 0.1% consensus forecast, while the annual rate moved up to 3.7%. Market participants are now looking to upcoming remarks from Fed officials at the Jackson Hole symposium for additional guidance on the future path of US monetary policy.
| Indicator / Forecast | Latest Value / View | Context |
|---|---|---|
| AUD/USD | ~0.7180 | Third consecutive day of gains during Asian session on Thursday |
| Australia Q2 Private Capital Expenditure | -3.6% | Missed expectations of 0.0% after prior 6.5% gain |
| RBA cash rate (current) | 4.35% | Unchanged in August after three earlier hikes |
| NAB RBA rate call | 4.6% in September | Expects next hike at upcoming September meeting |
| Commonwealth Bank & ANZ RBA rate call | 4.6% in November | See risk of earlier hike despite base-case November move |
| Westpac–Melbourne Leading Index (6‑month annualised) | -0.2% in July | Improved from -0.4% in June; below trend for seven months |
| US PCE price index (m/m, July) | 0.2% | Above 0.1% forecast |
| US PCE price index (y/y) | 3.7% | Annual rate edged higher |
Australian Dollar: Key Macro Drivers
One of the main influences on the Australian Dollar (AUD) is the interest rate level set by the Reserve Bank of Australia (RBA). As Australia is rich in natural resources, movements in the price of its major export, Iron Ore, are also important. Additional factors include the health of the Chinese economy as Australia’s largest trading partner, domestic inflation, growth dynamics, and the Trade Balance. Market risk appetite plays a role as well, with a risk-on backdrop generally supportive for the AUD, and risk-off conditions usually weighing on the currency.
Role of RBA Policy in AUD Performance
The RBA shapes AUD valuations by determining the interest rate at which Australian banks lend to one another, influencing borrowing costs throughout the economy. Its primary objective is to keep inflation in a 2-3% range by raising or lowering rates. When Australian rates exceed those of other major central banks, the AUD tends to benefit; when they are relatively lower, the currency can face pressure. The RBA can also adjust financial conditions through quantitative easing or tightening, with the former seen as AUD-negative and the latter generally viewed as AUD-positive.
China, Iron Ore, and Trade Balance Effects
China’s economic performance is a major consideration for the AUD, given its status as Australia’s largest export market. Stronger Chinese activity usually boosts demand for Australian raw materials, goods, and services, underpinning the AUD, while weaker outcomes often have the opposite impact. Surprises – positive or negative – in Chinese growth indicators can therefore translate quickly into moves in AUD crosses.
Iron Ore, Australia’s largest export, is a key channel through which global demand influences the currency. Rising Iron Ore prices typically coincide with greater demand for AUD, while falling prices can weigh on it. Higher prices also tend to support a more favorable Trade Balance, which itself is a supportive factor for the currency when export revenues exceed import costs. Conversely, a negative Trade Balance can be a headwind for the AUD.
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