Australian Dollar fails to stop the bleeding as while markets gear for an important week
|- AUD/USD extended its decline, but a soft US Dollar might help to limit losses.
- Lingering doubts over the effectiveness of China's stimulus measures weighed on AUD despite positive commodity prices.
- Market sentiment indicates a 50% chance of a 25-basis-point RBA rate cut by year-end.
The AUD/USD The AUD/USD pair extended its decline on Monday, falling by 0.31% to 0.6586. The pair broke below key support at 0.6600 and the critical 200-day SMA, suggesting further weakness ahead for the Aussie Dollar. Lingering doubts over the effectiveness of China's stimulus measures weighed on AUD despite positive commodity prices. A hawkish Reserve Bank of Australia (RBA) continues to support the Aussie in the background.
On the US side, markets await key data to be released this week. Markets will get a jobs reports as well as Gross Domestic Product (GDP) revisions. ISM PMI data is also due this week
Daily digest market movers: Australian Dollar declines, markets await higher-tier data from the US
- Despite a subdued US Dollar, doubts over China's stimulus impacted the Australian Dollar.
- A possible USD correction and a hawkish RBA might help the Aussie.
- Deputy Governor Hauser warned against overestimating potential RBA rate cuts.
- On the US side, markets will get a Gross Domestic Product revision, Nonfarm Payrolls and ISM PMIs from October, which will help set the short-term direction for the pair.
AUD/USD technical outlook: Bears in control, RSI oversold and red MACD hint at a possible correction
The Relative Strength Index (RSI) has fallen into the oversold area, indicating that selling pressure is rising but that it might be over-extended. The Moving Average Convergence Divergence (MACD) histogram is red and rising, further suggesting that selling pressure is increasing.
The overall outlook is bearish, indicating that a downward trend is likely to continue in the near term but that a correction is possible. Support levels can be identified at 0.6570, 0.6550 and 0.6530, while resistance levels can be found at 0.6750, 0.6800 and 0.6850.
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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