Australian Dollar stands weak after local CPI figures
|- AUD/USD retreats on resurgent demand for safe-haven US Dollar amid lingering global economic concerns.
- Hawkish RBA stance and market expectations of 50 bps Fed rate cut in November support the pair.
- Despite softer Australian CPI data, near-term RBA rate cuts remain unlikely.
The AUD/USD retreated on Wednesday, declining by 0.70% to 0.6850. The pair's decline came as the US Dollar regained its safe-haven appeal amidst persistent global economic concerns. Despite the weaker Australian Consumer Price Index (CPI) data, near-term RBA rate cuts remain unlikely, limiting the AUD/USD's downside potential. The upcoming speech from Federal Reserve (Fed) Chair Jerome Powell on Thursday and the US PCE Price Index on Friday will be closely watched for further cues on the central banks' monetary policy stance.
The Australian economy's outlook is uncertain due to contrasting indicators and the Reserve Bank of Australia's (RBA) aggressive stance on inflation. As a result, markets are anticipating a modest interest rate cut of only 0.25% in 2024, signaling a shift away from previous expectations of more significant easing.
Daily digest market movers: Australian Dollar declines as markets digest soft CPI, USD strength
- Despite positive news about China's new stimulus measures, global economic downturn concerns and geopolitical risks make investors cautious, leading to a weaker open in European equity markets.
- The safe-haven US Dollar rebounds from its lowest point this year, benefiting from risk aversion and driving flows away from the risk-sensitive Australian Dollar.
- The market predicts a 50-basis-point rate cut by the Fed in November, contrasting with the Reserve Bank of Australia's hawkish stance, supporting AUD/USD.
- RBA Governor Michele Bullock indicates that recent data has not significantly affected the policy outlook, reinforcing the hawkish stance and limiting AUD/USD downside.
- Australian CPI data showed a decline to 2.7% YoY in headline inflation to its lowest level since early 2022, offering some relief but insufficient to warrant RBA rate cuts.
AUD/USD technical outlook: AUD/USD take a breather, no sell signal
The AUD/USD saw sharp upward movements which propelled the pair to multi-month highs near 0.6900 in the last sessions. That improved the outlook which remains bullish.
The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) took a big hit on Wednesday, but they shouldn't be considered a sell signal. The buyers seem to be taking a breather after reaching highs since December. A correction was necessary.
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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