Australian Dollar closes a losing week on falling commodity prices and risk-aversion
|- 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.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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