AUD to USD Forecast: Will Aussie Trade Data Tip the RBA’s August Rate Decision?

After discussing rate hikes in June, recent inflation and retail sales figures have raised more red flags for the RBA about inflation. Will improving trade terms tip the scales in favor of an August RBA rate hike?

Australian Trade Terms in the Spotlight Amidst a Mixed Basket of Stats

Australian trade terms will put the Australian economy and the AUD/USD under the spotlight on Thursday, July 4.

Economists forecast the Australian trade surplus to widen from A$6.548 billion in April to A$6.678 billion in May.

In April, exports declined by 2.5%, with imports sliding by 7.2%, signaling a deteriorating demand environment. Similar trends for May could test the determination among RBA Board members to tame inflation at all costs.

Trade is vital to the Australian economy, with a trade-to-GDP ratio of over 50%. Notably, 20% of its workforce is in trade-related jobs. Deteriorating trade terms could affect the Australian economy, labor market, and Aussie dollar.

The RBA may have to decide if inflation supersedes the labor market and the economy as other central banks, including the Fed, begin considering the timing of the next monetary policy loosening cycle.

For the RBA, one concern will be the effects of demand from China. Will the Chinese economy meet its 5% growth forecast?

Australian Trade Terms and the Chinese Economy

For context, the Australian trade surplus has trended lower over the last 12 months. The trade surplus stood at A$11.791 billion in May 2023 before falling to a 12-month low of A$5.024 billion in March 2024.

The deterioration in trade terms could have resulted from lackluster demand from China, the real estate market collapse, and the slump in iron ore prices during H1 2024. Other factors included trade tensions between the two countries and the weak global demand environment.

According to the ABS, the Australian economy expanded by 0.1% in Q1 2024. Net trade detracted 0.9 percentage points from GDP growth because of higher imports than exports.

Can improved diplomatic relations between Australia and China reignite the Aussie economy?

The RBA could be waiting in the wings. In the February RBA press conference, RBA Governor Michele Bullock stated that RBA staff considered China’s economic woes in its growth forecasts of 1.8% in 2024.

A pickup in demand and economic activity could lead to upward growth forecast revisions but could affect inflation projections.

However, experts remain divided on whether the RBA will hike, stick, or cut interest rates.

Expert Opinions Align with RBA Rate Hike Uncertainty

Westpac Chief Economist Luci Ellis took a more dovish stance, expecting the first RBA interest rate cut in November.

In contrast, Bloomberg TV APAC Chief Markets Editor David Ingles said the hotter-than-expected inflation numbers raised the chances of a September rate hike to 50-50.

In conclusion, recent inflation numbers suggest that the trade figures may not throw the RBA off its commitment to tame inflation. However, the RBA may be unwilling to send the economy into its second recession in thirty years.

Looking Ahead: Key Indicators to Watch

Aussie wage growth, unemployment, consumer confidence, retail sales, services sector activity, and inflation could directly influence the RBA rate path.

However, macroeconomic data from China and geopolitics may also influence the Chinese economy and its demand for Aussie goods.

With the US markets closed for the Fourth of July holidays, there are no US economic indicators for investors to consider.

Nevertheless, the Friday US Jobs Report could be crucial after Fed Chair Powell raised concerns about elevated wage growth trends.

Short-Term Forecast: Bullish

Near-term AUD/USD trends depend on Aussie trade data and the US Jobs Report. Improving Australian trade terms could support an August RBA rate hike if inflation does not cool. Conversely, a soft US Jobs Report could fuel investor bets on a September Fed rate cut, favoring the Aussie dollar.

With several key drivers in play, investors should monitor the news wires, real-time data, and expert commentary to manage trading strategies accordingly. Stay informed with our latest updates and insights to navigate the forex markets effectively.

AUD/USD Price Action

Daily Chart

The AUD/USD held above the 50-day and 200-day EMAs, affirming the bullish price signals.

An AUD/USD return to the $0.67500 handle could give the bulls a run at the $0.67967 resistance level.

Aussie trade data needs consideration.

Conversely, an AUD/USD drop below the $0.67003 support level could bring the 50-day EMA into play.

With a 14-period Daily RSI reading of 61.82, the AUD could rise to the $0.67967 resistance level before entering overbought territory.