Australian Dollar sees gains as markets await Fed's decision
|- AUD/USD soars due to a less hawkish Fed and a more hawkish RBA stance.
- Fed rate cut talks depreciate the US Dollar due to increased odds of 50 bps cut in Wednesday’s meeting.
- Lower US yields also weigh on the US Dollar.
The AUD/USD rose to 0.6735 in Monday's session, extending gains at the start of the week. The Australian Dollar's strength stems from increased dovish bets on the Federal Reserve (Fed) and a more hawkish stance by the Reserve Bank of Australia (RBA).
The Australian economy faces a complex outlook amid rising inflation and a cautious central bank. Despite initial expectations of interest rate cuts, the Reserve Bank of Australia's hawkish stance has prompted markets to anticipate only a modest 25 bps reduction in 2024.
Daily digest market movers: Australian Dollar rises sharply on Fed rate cut uncertainty and RBA's hawkish stance
- The Australian Dollar gained on Monday, influenced by the RBA's hawkish stance and uncertainty surrounding the Fed's interest rate decision on Wednesday.
- With inflation remaining elevated, RBA Governor Michele Bullock emphasized the need for caution and indicated that rate cuts remain premature.
- Due to uncertainty over the magnitude of the Fed's rate cut at its Wednesday meeting, US Treasury yields fell, exerting downward pressure on the US Dollar.
- The CME FedWatch Tool indicates a 40% probability of a 25 bps rate cut and a near 60% chance of a 50 bps reduction.
AUD/USD technical outlook: Bulls must take the 20-day SMA to confirm a recovery
The AUD/USD pair has been trading with a mixed outlook in the past sessions. The Relative Strength Index (RSI) is at 55, suggesting that buying pressure is rising. The Moving Average Convergence Divergence (MACD) red bars are decreasing, suggesting that selling pressure is declining but steady. A consolidation above the 20-day Simple Moving Average (SMA) at 0.6735 could be considered a buying signal, which would confirm a bullish outlook for the short-term.
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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