Australian Dollar remains tepid due to economic slowdown in China
|- The Australian Dollar extends losses due to a sharp drop in energy and metal prices.
- The AUD may limit its downside due to a potential rate hike from the RBA.
- The US Dollar faces challenges due to increasing bets on a Fed rate cut in September.
The Australian Dollar (AUD) weakens for the seventh consecutive session on Tuesday, driven by a steep drop in energy and metals prices. Given Australia's heavy reliance on commodity exports, the AUD is particularly sensitive to fluctuations in these assets.
Additionally, "The interest rate cuts by the People's Bank of China (PBoC) and the outcomes of the Third Plenum are too modest to convince market participants that a significant acceleration in the Chinese economy is in prospect," said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia. Any changes in the Chinese economy could impact the Australian markets, as both nations are close trade partners.
Read more: Fresh weakness comes from China
The AUD could receive support as robust employment data indicate tight labor market conditions and raise concerns about a potential interest rate hike from the Reserve Bank of Australia (RBA). Investors look forward to Australian manufacturing and services PMI figures this week to gauge the economy's health.
The AUD/USD pair could limit its downside as the US Dollar (USD) faces challenges on rising bets on a Federal Reserve (Fed) rate cut in September. Federal Reserve (Fed) Chair Jerome Powell noted that he is becoming more hopeful about the progress on inflation in recent months. Meanwhile, Fed Governor Christopher Waller stated that the time to lower the policy rate is drawing closer.
Daily Digest Market Movers: Australian Dollar declines due to lower energy, metal prices
- Media reports say that Vice President Kamala Harris has just passed 1,976 Democratic delegates to secure the party's presidential nomination. Harris is now the Democratic Party’s Presumptive Nominee for November’s Presidential Election.
- The weak outlook for the Chinese economy has driven copper prices to their lowest in over three months and caused a decline in iron ore prices, which is also putting pressure on the Australian Dollar.
- Steel rebar futures dropped below CNY 3,250 ($447) per tonne, reaching their lowest level in over seven years. China's economy grew less than anticipated in the second quarter. June saw the steepest decline in home prices in nine years, highlighting the severity of the crisis in the country's real estate sector.
- The People’s Bank of China (PBoC) has cut one- and five-year loan prime rates by ten basis points to 3.35% and 3.85%, respectively. Any change in the Chinese economy could impact the Australian markets as both countries are close trade partners.
- China's $715 billion hedge fund industry braces for increased pressure as new regulations take effect next month. These stricter guidelines will require funds to meet higher asset thresholds and more stringent rules for investments and marketing. As a result, some investment firms are now seeking additional capital, according to a Reuters report.
- Federal Reserve Bank of New York President John Williams stated on Friday that the long-term trends that caused declines in neutral interest rates before the pandemic continue to prevail. Williams noted, "My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic," according to Bloomberg.
- Australian Bureau of Statistics on Thursday showed that Employment Change increased by 50,200 in June from May, surpassing market forecasts of 20,000.
- Reuters cited Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, saying, "The current pace of employment growth suggests demand is resilient and cost pressures will remain. We think the RBA will stay the course and keep rates on hold, but August is certainly a live meeting."
- Fed Chair Powell stated last week that the three US inflation readings from this year "add somewhat to confidence" that inflation is on track to meet the Fed’s target sustainably, suggesting that a shift to interest rate cuts may be imminent.
Technical Analysis: Australian Dollar drops to near 0.6650
The Australian Dollar trades around 0.6650 on Tuesday. The daily chart analysis shows that the AUD/USD pair depreciates within a descending channel, signaling a bearish bias. Although the 14-day Relative Strength Index (RSI) is below the 50 level, suggesting a confidence of a bearish trend.
The AUD/USD pair might test the lower boundary of the descending channel around the 0.6630 level. A decline below this level could pressure the pair to navigate the throwback support around 0.6590.
The immediate resistance appears at the nine-day Exponential Moving Average (EMA) at 0.6693, followed by the psychological level of 0.6700. A breakthrough above the latter could lead the AUD/USD pair to test the upper boundary of the descending channel around the 0.6760 level, followed by a sixth-month high of 0.6798.
AUD/USD: Daily Chart
Australian Dollar PRICE Today
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the weakest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.02% | 0.06% | -0.41% | 0.06% | 0.18% | 0.23% | -0.01% | |
| EUR | -0.02% | 0.04% | -0.41% | 0.04% | 0.16% | 0.19% | -0.04% | |
| GBP | -0.06% | -0.04% | -0.44% | 0.00% | 0.13% | 0.17% | -0.08% | |
| JPY | 0.41% | 0.41% | 0.44% | 0.48% | 0.58% | 0.61% | 0.36% | |
| CAD | -0.06% | -0.04% | -0.01% | -0.48% | 0.11% | 0.14% | -0.09% | |
| AUD | -0.18% | -0.16% | -0.13% | -0.58% | -0.11% | 0.04% | -0.21% | |
| NZD | -0.23% | -0.19% | -0.17% | -0.61% | -0.14% | -0.04% | -0.25% | |
| CHF | 0.01% | 0.04% | 0.08% | -0.36% | 0.09% | 0.21% | 0.25% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).
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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