Australian Dollar extends gains as high inflation prompts RBA to delay rate cuts
|- The Australian Dollar appreciates due to the hawkish sentiment surrounding the RBA.
- Australia’s May inflation has sparked warnings that the RBA might raise the cash rate to 4.6% in September.
- The US Dollar may struggle as slowing US employment growth could lead the Fed to reduce rates sooner.
The Australian Dollar (AUD) appreciates despite improved risk aversion on Monday. The AUD receives support as persistent high inflation, stronger Retail Sales, and Services PMI prompt the Reserve Bank of Australia (RBA) to delay potential rate cuts. However, the renewed demand for the US Dollar (USD) puts pressure on the AUD/USD pair.
The RBA’s June Meeting Minutes indicated that policymakers emphasized the need to stay alert to upside inflation risks. The policymakers noted that a significant rise in prices might necessitate substantially higher interest rates. Although rates were steady in June, May’s CPI, which surprisingly increased to 4.0% from the previous 3.6%, prompted warnings that the RBA might raise the cash rate to 4.6% in September.
The US Dollar (USD) may face challenges as US employment growth slowed in May, according to data released on Friday. While Nonfarm Payrolls (NFP) exceeded market expectations in June, the growth was slower compared to May's increase. Additionally, the Unemployment Rate edged higher in June. This could lead traders to speculate that the Federal Reserve (Fed) might reduce interest rates sooner rather than later.
The CME's FedWatch Tool shows that rate markets are pricing in an almost 70.7% probability of a rate cut in September, up from 64.1% a week earlier.
Daily Digest Market Movers: Australian Dollar declines due to risk aversion
- US Nonfarm Payrolls (NFP) increased by 206,000 in June, following a rise of 218,000 in May. This figure surpassed the market expectation of 190,000.
- The US Unemployment Rate edged up to 4.1% in June from 4.0% in May. Meanwhile, Average Hourly Earnings decreased to 3.9% year-over-year in June from the previous reading of 4.1%, aligning with market expectations.
- According to the Australian Bureau of Statistics on Thursday, Australia's trade surplus for May was A$5,773 million ($3,868 million), lower than the expected A$6,678 million and down from the previous reading of A$6,548 million.
- Australia's Retail Sales, a measure of the country's consumer spending, increased by 0.6% MoM in May, up from the previous month's 0.1% rise. This figure exceeded market expectations of a 0.2% increase.
- Judo Bank's Australia Services PMI increased to 51.2 MoM, up from the previous month's 51.0, surpassing the forecasted drop to 50.6. Meanwhile, the Composite PMI rose to 50.7 MoM, compared to 50.6 in the previous month.
- China's Services Purchasing Managers' Index (PMI) fell from 54.0 in May to 51.2 in June, according to the latest data released by Caixin on Wednesday. The market forecast was for a 53.4 figure in the reported period.
- Federal Reserve Bank of Chicago President Austan Goolsbee stated on BBC Radio on Wednesday that bringing inflation back to 2% will take time and that more economic data are needed. However, on Tuesday, Fed Chair Jerome Powell said that the central bank is getting back on the disinflationary path, per Reuters.
Technical Analysis: Australian Dollar holds position around 0.6750
The Australian Dollar trades around 0.6740 on Monday. The analysis of the daily chart shows that the AUD/USD pair breaks below a rising wedge, indicating a potential bearish reversal. Additionally, the 14-day Relative Strength Index (RSI) consolidates slightly below the 70 level. A downward move in the RSI would suggest the asset may undergo a correction.
The AUD/USD pair is likely to test the lower boundary of the rising wedge around 0.6755, followed by the psychological level of 0.6800 near the upper boundary of the wedge.
On the downside, the AUD/USD pair may navigate the region around the 50-day Exponential Moving Average (EMA) at 0.6639.
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 strongest against the British Pound.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.13% | 0.03% | -0.11% | -0.03% | 0.04% | -0.10% | -0.11% | |
| EUR | -0.13% | 0.10% | 0.10% | 0.18% | 0.07% | 0.10% | 0.10% | |
| GBP | -0.03% | -0.10% | -0.04% | 0.07% | -0.04% | -0.01% | -0.01% | |
| JPY | 0.11% | -0.10% | 0.04% | 0.08% | 0.17% | 0.16% | 0.06% | |
| CAD | 0.03% | -0.18% | -0.07% | -0.08% | 0.03% | -0.09% | -0.06% | |
| AUD | -0.04% | -0.07% | 0.04% | -0.17% | -0.03% | 0.03% | 0.03% | |
| NZD | 0.10% | -0.10% | 0.00% | -0.16% | 0.09% | -0.03% | 0.00% | |
| CHF | 0.11% | -0.10% | 0.00% | -0.06% | 0.06% | -0.03% | -0.00% |
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).
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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