Australian Dollar declines as USD strengthens
|- USD recovered after signs of sticky inflation on July's PCE.
- Recovery momentum in AUD throughout August has been supported mainly by the weak USD and improved conditions of risk-related assets.
- RBA's hawkish stance continues to benefit the Aussie.
The AUD/USD declined by 0.70% to 0.6750 in Friday's session as the USD strengthened in response to July's Personal Consumption Expenditures (PCE) figures. Despite this, the Reserve Bank of Australia's (RBA) hawkish stance may limit further declines in the AUD.
Despite a complex economic outlook for Australia, the RBA has taken a rigid stance in response to persistent inflation. As a result, financial markets now anticipate a modest 25-basis-point reduction in interest rates by 2024.
Daily digest market movers: Australian Dollar takes a breather, fundamentals still favor further upside
- RBA maintains OCR at 4.35%, signaling a cautious approach and ongoing inflation concerns.
- Governor Bullock emphasizes RBA's readiness to hike rates further if necessary.
- Copper and iron ore price gains also contributed to AUD upside momentum.
- US PCE inflation data showed core inflation rising 2.6%, slower than estimated and indicating a sticky underlying inflation.
- Divergence between Federal Reserve (Fed) and RBA might limit the pair's downside.
AUD/USD technical outlook: Bearish momentum appears, pair loses 0.6800
The Relative Strength Index (RSI) is currently at 58, pointing down, indicating that selling pressure is increasing. The Moving Average Convergence Divergence (MACD) is showing flat green bars, suggesting that the bullish traction is running out of gas.
However, it all points to buyers taking a breather after August's furious rally, which saw indicators near overbought terrain.
Key support levels to watch are 0.6750 and 0.6730, while resistance levels to consider are 0.6800 (previous support) and 0.6830.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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