- AUD/USD mildly declines to 0.6660 on Monday.
- Markets await latest RBA and Fed meeting minutes for additional guidance.
- On Monday, the US reported ISM PMIs that showed no surprises.
Monday's session recorded a moderate slip in the Australian Dollar (AUD) value against the US Dollar. As a result of persistently high inflation in Australia and some signs of softening in the US, meeting minutes from both the Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) will be closely watched this week. Labor market figures from June from the US are also due.
The Australian economy demonstrates some signs of weakness. However, the stubbornly high inflation is prompting the RBA to delay potential rate cuts. The RBA is one of the last G10 country central banks expected to issue rate cuts. This delay might further strengthen the Aussie.
Daily digest market movers: Aussie observes slight losses as market holds breath for packed week
- Australian Dollar's value saw a slight increase because of the stubbornly high inflation figures that prevent the RBA from initiating rate cuts.
- Market predicts around 40% odds of a 25-basis-point rate hike on the September 24 RBA meeting, extending to 50% leading up to November 5.
- In Australia, the May's Retail Sales data will be closely observed, which is scheduled for release on Wednesday. The expectation is for a 0.3% MoM rise compared with 0.1% in April.
- Prospect of a Fed interest rate cut in September is now at 70% and will be guided by the data in the week ahead and Powell’s speech on Tuesday.
Technical analysis: AUD/USD sways between 0.6600-0.6700
From a technical outlook, the AUD/USD pair has been trading sideways since mid-May in the 0.6600-0.6700 range. Traders on either side are struggling to dominate the direction, while indicators remain flat. The 20-day Simple Moving Average (SMA) at 0.6640 is acting as a robust support level, with further support seen below at 0.6620 and 0.6600. Descriptive resistance levels are situated at 0.6660, 0.6690, and 0.6700.
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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