- Aussie remains weak as markets await inflation data, Retail Sales from Australia.
- Soft China outlook generates concerns for Australian economy.
- RBA’s hawkish outlook might bail out the Aussie.
The Aussie continues the week on a soft trajectory with the AUD/USD declining by 0.20% to 0.6535 ahead of Retail Sales and inflation data that will guide market expectations further on the Reserve Bank of Australia’s (RBA) next moves. In the meantime, the economic concerns tied to the Chinese economy keep the Australian currency restrained.
With the Australian economy under pressure, inflation persistently above bounds continues to encourage the RBA to postpone rate cuts. According to forecasts, the RBA is expected to be among the tail-enders of the G10 nations who introduce a rate cut, which should limit the Aussie’s downside.
Daily digest market movers: Aussie expected to continue its weakness with anticipation of Inflation and Retail Sales data
- Perpetual 'risk-off' sentiment persists with Australia's economic bearing heavily influenced by worries over Chinese economic slowdowns. Attention will turn toward June's and Q2 CPI data on Wednesday.
- Similar to Q1, Australia’s Q2 headline Consumer Price Index (CPI) is projected to manifest a rise of 1.0% QoQ while anticipating an acceleration to 3.8% YoY from the previous 3.6%. Concurrently, the June headline CPI is predicted to drop to 3.8% YoY.
- With the inflation rate substantially outreaching the 2-3% target range, the RBA is projected not to hastily alter its policy. In that sense, the swaps market is seeing the first 25 bps cut next summer.
- Q2 will also watch the release of real Retail Sales data on Tuesday. Retail Sales volume for Q2 is predicted to show a less severe decline of 0.2% QoQ, comparatively lesser than Q1's 0.4%.
AUD/USD technical analysis: A sustained bearish outlook persists, fundamentals might help in short term
The AUD/USD's continuation below the 20, 100 and 200-day Simple Moving Average (SMA) poses concerns, hinting at a likely prolongment of the bearish trend.
While indicator signals are still deeply rooted in the negative, the oversold situation might lead to a correction. However, the bullish momentum remains weak, intimating at a potential period of sideways trade barring any fundamental catalysts. The mentioned inflation and Retail Sales figures might open the door for an upward move.
Key support levels have revamped to 0.6530 and 0.6500, while resistance levels remain at 0.6600 (200-day SMA), 0.6610 and 0.6630.
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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