While economists expect a November RBA rate cut, traders have tempered bets on aggressive Fed rate cuts, sending AUD/USD below the $0.66 level.
Dovish Fed speakers may revive bets on two rate cuts in the fourth quarter. A more dovish Fed rate path could narrow the US-Australia rate differential, favoring the Aussie dollar. A narrower rate differential may send AUD/USD toward $0.665.
Conversely, hawkish chatter, favoring the delaying of rate cuts over inflation concerns, could widen the rate differential in favor of the greenback. A wider rate differential may drag AUD/USD toward $0.655. If breached, $0.65 would be the next key support level.
Shifting focus to the AUD/USD pair, the People’s Bank of China interest rate decision could influence price trends. Economists expect the PBoC to keep the one-year and five-year loan prime rates (LPRs) steady at 3% and 3.5%, respectively.
A surprise rate cut could boost demand for the Aussie dollar.
Why do AUD/USD traders need to track the PBoC’s policy decisions?
Lower interest rates could raise demand for credit and boost consumption. A pickup in domestic demand may improve Aussie trade terms, given that China accounts for roughly one-third of Australian exports.
With a trade-to-GDP ratio of over 50%, rising exports may lift the economy, potentially reducing bets on multiple RBA rate cuts. A less dovish RBA policy stance could boost appetite for the Aussie dollar.
On the other hand, the Aussie dollar could face selling pressure if the PBoC maintains interest rates. Domestic demand has waned in the third quarter, pressuring Beijing to introduce fresh stimulus. Weaker demand from China may support expectations of multiple RBA rate cuts to bolster the economy.
RBA Governor Michele Bullock previously commented on the effects of Beijing policies on the Aussie economy, stating:
“If China bolsters its economy with fiscal stimulus, that could cushion the impact of tariffs on Australia’s economy.”
AUD/USD: Key Scenarios to Watch
Bearish AUD/USD Scenario: PBoC policy hold, rising US-China trade tensions, or dovish RBA rhetoric may drag AUD/USD toward $0.655.
Bullish AUD/USD Scenario: PBoC rate cut, progress toward a US-China trade deal, or hawkish RBA rhetoric could send AUD/USD toward $0.665.
