- The Australian Dollar trades on a stronger note, bolstered by the mixed Australian employment data on Thursday.
- The number of employed people rose by 50.2K, while the Unemployment Rate ticks higher to 4.1%.
- The emergence of some USD buying keeps a lid on any meaningful upside for the AUD/USD pair.
The Australian Dollar (AUD) strengthens during the early European session on Thursday. The uptick in AUD is supported by a relatively stronger domestic jobs report, which supports the case for another possible rate hike by the Reserve Bank of Australia (RBA). Apart from this, the underlying bullish sentiment surrounding the global equity markets benefits the risk-sensitive Aussie and assists the AUD/USD pair to register a modest recovery from the vicinity of a two-week low, around the 0.6715 region touched on Tuesday.
That said, rising economic headwinds in China, along with falling copper prices, hold back bulls from placing aggressive bets around the resources-linked Australian Dollar. The US Dollar (USD), on the other hand, gains some positive traction and reverses a part of the precious day's losses to a nearly four-month low. This further contributes to capping the AUD/USD pair, warranting some caution before confirming that the recent pullback from a multi-month peak has run its course.
Daily Digest Market Movers: Australian Dollar bulls seem reluctant as modest USD strength offsets stronger jobs data
- The official data published by the Australian Bureau of Statistics (ABS) this Thursday showed that the Unemployment Rate rose to 4.1% in June as compared to expectations and the previous figure of 4.0%.
- A slight disappointment, however, was offset by an unexpected rise in the number of employed people, from 39.7K in May to 50.2K in June, well above consensus estimates pointing to a reading of 20.0K.
- The mixed data, however, does little to influence expectations about the Reserve Bank of Australia's next policy move, albeit provides a modest lift to the Australian Dollar and the AUD/USD pair.
- The US Dollar, on the other hand, attracts some buyers and reverses a part of the previous day's heavy losses to a nearly four-month trough, which keeps a lid on any meaningful gains for the major.
- Meanwhile, a September interest rate cut by the Federal Reserve is fully priced in and investors are betting on the possibility of two rate cuts by year-end, which should cap the upside for the USD.
Technical Analysis: AUD/USD seems vulnerable amid the formation of bearish rising wedge on daily chart
From a technical perspective, the AUD/USD pair bounces off support marked by an upward-sloping trend line. This, along with another ascending trend line, constitutes the formation of an ascending wedge – a pattern with a bearish tendency. Moreover, oscillators on the said daily chart have just started drifting in the negative territory and suggest that the attempted recovery runs the risk of fizzling out rather quickly.
Hence, any subsequent move up is more likely to attract some sellers near the mid-0.6700s and remain capped. Some follow-through buying, however, has the potential to lift spot prices back towards the 0.6800 mark, or a multi-month peak touched last week. A sustained strength beyond the latter will negate the near-term negative outlook and pave the way for the resumption of the prior well-established uptrend.
On the flip side, the aforementioned trend-line support, currently pegged near the 0.6700 round figure, could act as immediate support. This is followed by the 50-day Simple Moving Average (SMA), around the 0.6665 region, which if broken decisively will be seen as a fresh trigger for bearish traders. The AUD/USD pair might then accelerate the fall towards the 100-day SMA support near the 0.6600 mark.
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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