AUD/USD Trading Steady After Big Surge

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On Thursday, the Australian dollar experienced only slight declines. As of late morning in Europe, AUD/USD has dropped 0.17% to a rate of 0.6822.

On Wednesday, the Australian dollar skyrocketed by an impressive 1.6%, hitting its highest level in three weeks due to news that China was pondering lifting restrictions on coal imports from Australia.

“China’s willingness to consider easing trade restrictions on coal from Australia could be a positive sign for the prospects of an improved trading relationship between the two countries,” said one analyst.

Ever since the new Australian government took power in 2020, Australia and China have experienced a mending of ties; this is further evidenced by the ban that has been upheld throughout.

This strategic move was made to benefit Australia’s economy, but oddly enough, the government kept mum and only noted that alternative markets had been found for coal.

Australia is heavily reliant on opulent dealings with China, making any Chinese developments a critical factor in deciding the fate of our Australian dollar. As such, it’s no surprise that China currently holds the position of Australia’s leading trading partner.

By reversing its virus prevention strategy, from total containment to lifting restrictions, China is setting itself up for long-term economic growth.

Despite the recent surge in COVID cases, China’s economy is predicted to slow or contract during the first quarter of 2023. A decrease in service demands and production due to workers reporting sick could be a significant obstacle for the Australian dollar and other currencies alike.

The Federal Reserve minutes affirmed the firm attitude expressed by Jerome Powell during the December meeting. Federal Open Market Committee members asserted that soaring inflation could not be tolerated and a strict policy had to remain in place until prices showed signs of retreating towards their target level of 2%. Thus, more evidence was needed to prove that inflation is on a sustained downward trajectory.

Despite the Fed’s aggressive rhetoric, there is still discord between what they said and how markets are pricing it. Minutes from their meeting showed that no FOMC members anticipate any rate cuts this year; however, investors have priced in a potential slight decrease by the end of 2023 with an expected funds rate peak at 4.5%-4.75%.

Conversely, the Federal Reserve is predicting rates to increase to 5%, with Minneapolis Fed President Kashkari further indicating that they could reach as high as 5.4% if inflation trends are not tempered in time.

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