Australian Dollar remains stronger following China Trade Balance

• The Australian Dollar remains stronger due to the hawkish sentiment surrounding the RBA’s policy outlook.
• China's Trade Balance came in at 84.65 billion in July, falling short of the 99.0 billion expected.
• The US Dollar struggles as recent employment data fueled higher odds of a Fed rate cut in September.

The Australian Dollar (AUD) extends its gains against the US Dollar (USD) for the second consecutive session on Wednesday. This upside is attributed to the Reserve Bank of Australia's (RBA) monetary policy decision on Tuesday. The RBA maintained the Official Cash Rate (OCR) at 4.35% for the sixth time.

RBA Governor Michele Bullock highlighted the ongoing risk that inflation might take too long to return to target and noted that interest rates might need to remain higher for an extended period. Bullock stated that a near-term reduction in the cash rate does not align with their current strategy.

However, the second-quarter inflation data has diminished expectations for another RBA rate hike. Markets estimate an RBA rate cut in November, a move anticipated much earlier than previously forecasted for April next year.

The AUD/USD pair could further strengthen as the US Dollar receives pressure since markets expect a more aggressive rate cut starting in September after the weaker US employment data in July raised the fear of a looming US recession.

Daily Digest Market Movers: Australian Dollar advances due to hawkish RBA

• 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. Any change in the Chinese economy could impact the Australian market as both countries are close trade partners.
• 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.
• According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly expressed increased confidence on Monday that US inflation is moving towards the Fed's 2% target. Daly noted that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.”
• Chicago Fed President Austan Goolsbee stated on Monday that the US central bank is prepared to act if economic or financial conditions worsen. Goolsbee emphasized, "We're forward-looking about it, and so if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it.” according to Reuters.
• The Judo Bank Australia Composite PMI dropped to 49.9 in July from 50.2 in June, falling below the neutral 50 mark for the first time since January. The Services PMI decreased to 50.4 in July from 51.8 in June. While this represents the sixth consecutive month of expansion in services activity, the growth rate was marginal and the slowest observed in this sequence.

Technical Analysis: Australian Dollar advances to near 0.6550

The Australian Dollar trades around 0.6540 on Wednesday. The daily chart analysis shows that the AUD/USD pair has broken above the descending channel, signaling a reduction in bearish momentum. Furthermore, the 14-day Relative Strength Index (RSI) is rising from the oversold 30 level, indicating a potential for further upward movement.

In terms of support, the upper boundary of the descending channel around the level of 0.6490 could act as immediate support. A return to the descending channel could reinforce the bearish bias and exert pressure on the AUD/USD pair to test the throwback support of 0.6470 level, followed by the lower boundary of the descending channel around the level of 0.6430

On the upside, the nine-day Exponential Moving Average (EMA) at 0.6540 serves as immediate resistance, with additional resistance at the 0.6575 level, where "throwback support" has turned into resistance. A breakout above this level could push the AUD/USD pair toward a six-month high of 0.6798.

AUD/USD: Daily Chart