Australian Dollar offers its gains despite the hawkish RBA, downside seems limited
|- The Australian Dollar declines despite higher-than-expected Chinese inflation data.
- China's CPI increased 0.5% YoY in July, against the expected 0.3% and previous 0.2% readings.
- CME FedWatch tool suggests a 100% odds of a 25-basis point Fed rate cut in September.
The Australian Dollar (AUD) loses ground against the US Dollar (USD) despite the upbeat inflation data released from China on Friday. Additionally, the AUD/USD pair gained ground following the hawkish comments from Reserve Bank of Australia (RBA) Governor Michele Bullock on Thursday.
China's Consumer Price Index (CPI) rose 0.5% year-on-year in July, exceeding the expected 0.3% and previous 0.2% readings. Meanwhile, the monthly index also increased 0.5%, swinging from the previous decline of 0.2%. Any change in the Chinese economy could impact the Australian markets as both countries are close trade partners.
Governor Bullock highlighted the importance of remaining cautious regarding inflation risks and expressed readiness to raise rates if needed, noting that inflation might not fall back to the 2–3% target range until late 2025. Additionally, the Aussie Dollar saw gains following the RBA's assertive choice to keep the cash rate at 4.35% on Tuesday.
The US Dollar retraces its recent gains as the Federal Reserve (Fed) is widely anticipated to implement a rate cut in September. According to the CME FedWatch tool, markets are now fully pricing in a quarter-basis point interest rate cut by the Fed in September.
Daily Digest Market Movers: Australian Dollar struggles despite a hawkish RBA
- Westpac updated its RBA forecast, now predicting the first-rate cut will occur in February 2025, a shift from the previously anticipated November 2024. They also revised their terminal rate forecast to 3.35%, up from the previous 3.10%. The RBA is now viewed as more cautious, needing stronger evidence before considering rate cuts.
- On Thursday, Kansas City Fed President Jeffrey Schmid stated that reducing monetary policy could be "appropriate" if inflation remains low. Schmid noted that the current Fed policy is "not that restrictive" and that while the Fed is close to its 2% inflation goal, it has not yet fully achieved it, per Reuters.
- US Initial Jobless Claims dropped to 233,000 for the week ending August 2, coming in under the market expectation of 240,000. This decline follows an upwardly revised figure of 250,000 for the previous week, which was the highest in a year.
- China's Trade Balance showed a surplus of 84.65 billion for July, falling short of the 99.0 billion expected and 99.05 billion previously. Exports (YoY) came in at 7.0% vs. 9.7% expected and 8.6% previously. Meanwhile, Imports increased 7.2% YoY against 3.5% expected, swinging from a decline of 2.3% prior.
- The AiG Australian Industry Index showed a slight easing in contraction in July, improving to -20.7 from the previous -25.6 reading. Despite this improvement, the index has indicated contraction for the past twenty-seven months.
- On Wednesday, Treasurer Jim Chalmers contested the RBA's view that the economy remains too robust and that large government budgets are contributing to prolonged inflation, according to Macrobusiness.
- On Tuesday, RBA Governor Michele Bullock mentioned that the board had seriously considered increasing the cash rate from 4.35% to 4.6% due to ongoing concerns about excess demand in the economy. Additionally, RBA Chief Economist Sarah Hunter noted on Wednesday that the Australian economy is performing somewhat stronger than previously anticipated by the RBA.
Technical Analysis: Australian Dollar rises to near 0.6600 amid a bullish reversal
The Australian Dollar trades around 0.6590 on Friday. The daily chart analysis shows that the AUD/USD pair moves upward within an ascending channel, indicating a bullish bias. Meanwhile, the 14-day Relative Strength Index (RSI) is approaching the 50 level. A break above the 50 level could confirm the bullish bias.
In terms of support, the AUD/USD pair may find immediate support at throwback support of 0.6575 level. A break below this level could reinforce the bearish bias and exert pressure on the pair to test the lower boundary of the ascending channel around the 0.6520 level. Further support appears at the throwback support level of 0.6470.
On the upside, the pair could test the upper boundary of the ascending channel at the 0.6610 level. A breakthrough above this level could lead the AUD/USD pair to explore the region again around a six-month high of 0.6798.
AUD/USD: Daily Chart
Australian Dollar PRICE Today
The table below shows the percentage change of the Australian Dollar (AUD) against listed major currencies today. The Australian Dollar was the weakest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.02% | -0.07% | -0.31% | -0.00% | 0.01% | -0.27% | -0.10% | |
| EUR | 0.02% | -0.03% | -0.22% | 0.01% | 0.03% | -0.26% | -0.08% | |
| GBP | 0.07% | 0.03% | -0.21% | 0.03% | 0.06% | -0.22% | -0.03% | |
| JPY | 0.31% | 0.22% | 0.21% | 0.26% | 0.28% | -0.03% | 0.18% | |
| CAD | 0.00% | -0.01% | -0.03% | -0.26% | 0.00% | -0.26% | -0.07% | |
| AUD | -0.01% | -0.03% | -0.06% | -0.28% | -0.01% | -0.29% | -0.10% | |
| NZD | 0.27% | 0.26% | 0.22% | 0.03% | 0.26% | 0.29% | 0.19% | |
| CHF | 0.10% | 0.08% | 0.03% | -0.18% | 0.07% | 0.10% | -0.19% |
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).
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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