The Influence of the Reserve Bank of Australia

The Reserve Bank of Australia (RBA) affects the Australian dollar (AUD) by setting interest rates for loans. These rates influence the overall economy. The RBA’s goal is to keep inflation stable at 2-3% by adjusting interest rates. When rates go up, the AUD usually gets stronger. The RBA may also use methods like quantitative easing or tightening, which change credit availability and impact the AUD. Australia’s trade with China plays a significant role in the value of the AUD. When China buys more Australian goods, the AUD rises. The price of iron ore, a major export to China, directly influences the AUD’s worth; higher prices lead to a stronger dollar. Australia’s Trade Balance, which shows the difference between exports and imports, also affects the AUD. A positive balance strengthens the currency. China’s manufacturing PMI recently nudged above 50.1, offering a fragile but slightly positive outlook for the Australian dollar. This suggests that China’s economy may be stabilizing after a tough year in 2025, but it isn’t a clear sign of strong recovery. Traders should view this as a cautious positive instead of a reason to aggressively buy the AUD.

Outlook for Iron Ore Prices

Weak data from China has a direct effect on the outlook for iron ore, Australia’s main export. Throughout the fourth quarter of 2025, iron ore prices have remained around $125 per tonne, significantly lower than earlier in the year. Until we see stronger signs of recovery in Chinese construction and manufacturing, a jump in iron ore prices—and consequently the Aussie dollar—seems unlikely. Back home, the Reserve Bank of Australia faces challenges. Recent inflation data from December shows core inflation stubbornly high at 3.5%. As a result, the RBA has kept the cash rate at 4.35% for several quarters. Meanwhile, the U.S. Federal Reserve has kept its rate steady at 5.25%. This rate difference supports the U.S. dollar and limits any gains for AUD/USD. Given this mixed situation, the AUD/USD pair, currently around 0.6700, may see low volatility as we approach January 2026. This environment can benefit derivative traders who sell volatility, like using short strangle options, by betting that the pair will stay within a certain range. The next important factor will be Australia’s quarterly inflation report in late January, which will influence the RBA’s next steps. Overall market sentiment remains cautious, which limits the appeal of risk-sensitive currencies like the AUD. While the global economy avoided the deep recession many feared in 2024, growth is still sluggish, and investors are wary. We believe this situation will keep the Aussie from experiencing a significant rally, despite some slightly better news from China. Create your live VT Markets account and start trading now.

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