Australian Dollar attempts to regain losses amidst ongoing concerns around the global economy
|- AUD saw a marginal recovery on Friday but was one of the worst-performing G10 currencies.
- Falling commodity prices and Chinese economic woes weighed on the Aussie.
- The USD remains steady after mixed PCE figures.
In Friday's session, the Australian Dollar (AUD) slightly recovered against the USD, as AUD/USD rebounded to 0.65515 due to corrective activities after intensive sell-offs in the previous sessions. The continual weakness in China's economy paired with depreciating iron ore prices remain the significant contributor to the AUD's dynamic performance.
Despite the visible vulnerability in the Australian economy, the Reserve Bank of Australia (RBA) delays its rate cuts due to persistently high inflation. This stance could potentially limit further depreciation of the AUD. As per current forecasts, the RBA might be one of the last among the G10 central banks to implement rate cuts, a condition that could extend the AUD's gains.
Daily digest market movers: Aussie sees marginal recovery amidst continuing economic stress in China and Australia
- AUD/USD has remained firmly rooted in the 'risk-off' sentiment, dominated by concerns over the Chinese economy and the AUD's 'high risk' G10 status.
- At the start of this week, the People’s Bank of China (PBoC) decided to cut rates, sparking fears about the health of the second-largest economy in the world, Australia’s primary trading partner.
- Additionally, Industrial metals prices remained under pressure due to lingering fears of weak Chinese demand.
- The Reserve Bank of Australia (RBA) remains hawkish, and markets bet on a potential rate hike in Q4, which mirrors the nearly 50% odds on either a September or November rate hike.
AUD/USD Technical analysis: Bearish outlook endures with the pair resting below main SMAs
The AUD/USD movement below the 20,100 and 200-day Simple Moving Averages (SMAs) still signals a significant area of concern, suggesting that the downward trends might continue and the downward shifts seen in July weren’t just corrective.
Key support levels line up at 0.6540, 0.6530, and 0.6500, while resistance levels lie at 0.6600 (ie., the 200-day SMA), 0.6610, and 0.6630.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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