Australian Dollar continues softish, Retail Sales from Australia on the watch
|- Aussie kicks off the week on soft note ahead of key data.
- Retail Sales and Inflation figures will guide market expectations.
- Economic concerns over China limit the Aussie’s upside.
The AUD saw a further decline against the USD on Monday as AUD/USD fell to 0.6545. Despite the expectations of a future rate hike by the Reserve Bank of Australia (RBA), issues with the local economy and Chinese economic woes persist, preventing any significant upward movement.
As the Australian economy shows signs of weakness, the persistent high inflation has prompted the Reserve Bank of Australia (RBA) to delay rate cuts. As per the current forecasts, the RBA stands to be among the last G10 nations to introduce a rate cut, potentially extending the gains of the AUD, but the economic concerns also push the currency down.
Daily digest market movers: Aussie looks weak ahead of Inflation and Retail Sales data
- The risk-off sentiment continues to dominate with Australia's economic climate being influenced by concerns over Chinese economic stress.
- This week, investors will be eyeing Australian June Q2 CPI data, due to be released on Wednesday.
- For Q2, the headline CPI is expected to match Q1's rise of 1.0% QoQ and accelerate to 3.8% YoY from 3.6% in Q1. Meanwhile, the June headline CPI is anticipated to fall to 3.8% YoY.
- With the inflation rate still above the 2-3% target range, the RBA is unlikely to rush toward a policy change. The swaps market predicts stability for the rest of the year with the first significant 25 bps cut expected next summer.
- Tuesday will also see Q2's Retail sales data release. Retail Sales volume is expected to show a less severe decline of 0.2% QoQ in Q2, compared to 0.4% in Q1.
AUD/USD Technical analysis: Bearish outlook underpins, the pair lies below major SMAs
The AUD/USD's movement below the 20,100 and 200-day Simple Moving Averages (SMAs) signals concern, indicating a probable persistence of the downward trend. In July, the pair recorded an extensive nine-day losing streak and fell nearly 3.50%.
Indicator signals are deeply entrenched in the negative, but the oversold scenario may stimulate a correction. However, the bulls' momentum remains weak, and technicals suggest a sideways trade period rather than an upsurge, barring any fundamental catalysts.
Key support levels line up at 0.6530 and 0.6500, while resistance levels lie at 0.6600 (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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