Australian Dollar moves lower on CPI data
|- Australian Dollar slides lower on CPI release.
- RBA has stated last week that rate cuts are not on the table.
- Markets are confident of a single 25 bps cut by year's end.
The Australian Dollar retreated against its US counterpart following the release of Australia's latest inflation data. The soft inflation data has reinforced expectations that the Reserve Bank of Australia (RBA) will cut interest rates later this year. A slowdown in household spending further suggests that the economic cycle in Australia may be easing.
Amidst a complex economic landscape in Australia, the RBA is concerned over persistent inflation and have prompted a cautious approach. With the soft figures released on Wednesday, the markets now anticipate a modest 25 basis point rate reduction in 2024.
Daily digest market movers: Australian Dollar declines on CPI data
- Australia's July Consumer Price Index (CPI) came in at 3.5% YoY, slightly higher than expected but still within the RBA's target range.
- Trimmed mean inflation fell to 3.8% y/y, its lowest level since January.
- The RBA has indicated that it is unlikely to cut interest rates in the near term, but the market continues to expect a 25 bp cut by year-end.
- If the RBA signals a hawkish approach, the downside for the Aussie is limited.
AUD/USD Technical Outlook: Pair sees slight decline, key levels in play
The AUD/USD pair experienced a slight decline on Wednesday, as buyers continued to lock in profits from last week’s rally. The Relative Strength Index (RSI) fell to 60, indicating a lean towards a neutral market sentiment. The Moving Average Convergence Divergence (MACD) shows flat green bars, suggesting a lack of momentum.
After last week’s gains, the pair has been consolidating within a range of 0.6750-0.6820, and a break above these levels might set the pace of the pair in the next sessions.
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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