Australian Dollar recovers as investor sentiment turns risk-on

08/09/2023 14:52:36 GMT|ByJoaquin Monfort

Australian Dollar recovers part of the previous day's loses on improving market sentiment.
Traders are venturing into riskier assets which is good news for the AUD but bad news for the safe-haven USD.
The Aussie tanked on Tuesday after China trade figures for July came out below expectations.
The data suggested Chinese demand for Australian raw materials was lessening.

The Australian Dollar (AUD) rebounds against the US Dollar (USD) on Tuesday as market sentiment improves, supporting commodity currencies such as the Aussie.

The recovery comes after one of the Australian Dollar's worst day's of the year when it fell to below 0.6500 briefly after the release of weak Chinese trade data suggested a potential slowdown in the global economy – and demand for Australia's raw materials.

Commentary from Federal Reserve officials later in the day, however, may have taken the edge off the Aussie's collapse, as the pair stabilized and began to recover.

AUD/USD now trades firmly back in 0.65s during the US session.

Australian Dollar news and market movers

The Australian Dollar reverses some of the previous day's losses as markets adopts a risk-on mode, helping commodity currencies such as the Australian Dollar.
The pair had dived to new lows for the summer after the release of China Trade Balance data on Tuesday, showed a substantial decline in imports and exports.
The data stoked fears China may be slowing down, that its property bubble could be on the brink of bursting, and that the global economy could start to decline.
It indicated reduced demand for commodities, especially Australia’s main export Iron Ore, traditionally imported and used to make steel for China’s vast property and infrastructure projects.
Measured in US Dollars, Chinese imports fell by 12.4% which was well below the 5.0% decline expected by economists and the 6.8% drop in the previous month of June.
In Yuan, imports fell 6.9% vs. -2.5% expected, and -2.6% previous.
Chinese exports in USD fell 14.5% against -12.5% expected and -12.4% recorded in June. In Yuan, exports declined 9.2% versus -8.9% forecast and -8.3% previously.
The Chinese trade balance in USD showed an $80.6B surplus versus the 70.6B expected and 70.62B previous.
In Yuan terms, the Trade Balance showed a surplus of 575.5B versus 625.25B forecast and 491.25B previous.
Australian data showed a decline into negative territory for the Westpac Consumer Confidence for August, which fell to -0.4% from 2.7% in July.
National Australia Bank’s (NAB) Business Conditions in July edged down to 10 from 11 in June but still beat estimates of 8. NAB's Business Confidence gauge rose to 2 from -1 forecast and -1 previous.
US 10-year Treasury Bond yields dived to below 4.000% again as demand for US T-bonds increased on the back of a flight to safety. This supported the Greenback, with the US Dollar Index (DXY) rising 0.5% on Tuesday.
China’s policy of trying to diversify away from relying too heavily on Australian raw materials is a long-term negative for the Aussie, according to Clifford Bennet, Chief Economist at ACY Securities.
The Aussie economy will not be ‘saved’ as it has done in the past by Chinese super-growth according to ACY’s Bennet.
AUD/USD could fall to as low as 0.40, according to David Llewellyn-Smith, Chief Strategist at the MB Fund and MB Super.
He likens the current market conditions to those in the 1990s, comparing China to Japan, which similarly underwent an economic boom before peaking in the 90s when the Japanese property bubble burst, bringing the good times to an end. Llewellyn-Smith foresees the same fate for China.
He further expects the US Dollar to maintain its value as the AI revolution creates a tech boom in the US, just as the dot-com bubble did in the 90s.
The Australian Dollar has been on a weak footing since the RBA left the policy rate unchanged at 4.1% last week, against the market expectation for a 25 basis point hike. In the policy statement, the RBA explained that the decision to hold rates unchanged would provide them more time to assess the impact of policy tightening to date and the economic outlook.
That said, they did not completely rule out the possibility of more rate hikes in the future, "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks," the RBA noted.
The US Dollar is likely to be impacted by US Consumer Price Index (CPI) data for July, out on Thursday at 12:30 GMT. Expectations are for CPI to rise by 3.3% YoY and 0.2% MoM, and for Core CPI to rise by 4.8% YoY and also 0.2% MoM.
An undershoot is likely to weigh on the US Dollar (bullish for AUD/USD) because it reduces the chances of the Federal Reserve (Fed) raising interest rates. The opposite is true of an overshoot.

Australian Dollar technical analysis

AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will give the longer-term charts a more bullish tone.

The 0.6458 low established in June is a key level for bears. If this is breached decisively, it would color the charts more bearish. Price is currently closer to this key low.

Australian Dollar vs US Dollar: Weekly Chart

Price has now broken cleanly below the confluence of moving averages (MA) close to 0.6700, made up of most of the major SMAs – the 50-week, 50-day and 100-day. The breaching of this key support and resistance level is a bearish sign.

Australian Dollar vs US Dollar: Daily Chart

AUD/USD has also broken below the 0.6600 June lows, and a continuation down to the key May lows at 0.6460, is quite possible. A decisive break below them would open the way for a move down to 0.6170 and the 2022 lows.

Because the pair is in a sideways trend overall, it is unpredictable, and the probabilities do not favor either bears or bulls overall – nor is the Relative Strength Index (RSI) providing much insight on either timeframe.

In technical terms, a ‘decisive break’ consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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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