- AUD/USD experiences an extended decline following release of labor market figures from Australia during Asian session.
- Federal Reserve's projection of higher interest rates continues to favor USD.
- Despite clearing some losses, US Treasury yields remain down by more than 2%.
The Australian Dollar (AUD) fell further against the US Dollar (USD) on Thursday despite strong labor market data from Australia reported earlier in the session. The US seems to be enjoying demand thanks to the interest rate revisions, which saw the Federal Reserve (Fed) governors forecasting fewer rate cuts this year. In addition, the Greenback kept its strength despite soft inflation figures reported during the European session.
The Australian economy shows some signs of weakness, but the stubbornly high inflation is prompting the Reserve Bank of Australia to delay cuts, which may limit the downside.
Daily digest market movers: Australian Dollar maintains selling bias despite positive employment numbers
- Australian Bureau of Statistics (ABS) released employment data showing a drop in Australia’s Unemployment Rate to 4.0% in May, meeting expectations. This figure marked a slight improvement from the previous rate of 4.1%.
- Australian Employment Change increased to 39.7K in May from 38.5K in April, surpassing the forecast of 30.0K.
- Participation rate increased slightly to 66.8% in May, up from 66.7% in April. There was a significant increase in Full-Time Employment, while Part-Time Employment decreased.
- On the US side, the US Bureau of Labor Statistics revealed on Thursday that the Producer Price Index (PPI) for final demand in the US rose 2.2% on a yearly basis in May, indicating looser inflationary pressure than expected.
- On the negative side, weekly Initial Jobless Claims came in higher than expected.
Technical analysis: AUD/USD sellers gather momentum, positive outlook remains
The Relative Strength Index (RSI) remains above 50 but points downwards, suggesting that bullish momentum might be losing steam. Meanwhile, the Moving Average Convergence Divergence (MACD) shows steady red bars indicating stable selling pressure.
However, the short-term outlook remains positive as the pair sustains its position above the 20-day Simple Moving Average (SMA) at 0.6640. If lost, the 100 and 200-day SMAs offer themselves as barriers around the 0.6560 area.
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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