- Aussie experiences some pressure after mixed Australian CPI figures.
- Traders are keeping vigilance on the upcoming NFP data.
- Markets are backing down on the rate hike hopes of the Reserve Bank of Australia.
The Australian Dollar continues to underperform against the US Dollar (USD), which is making a strong recovery following the Federal Open Market Committee (FOMC) policy decision. Chinese economic woes and cooling rate hike bets on the Reserve Bank of Australia (RBA) also pressure down the Aussie.
That being said the high inflation pressure continues to hold the RBA on the brink of rate cuts. Predictions propose that the RBA will be among the ultimate pockets of G10 countries to administer a rate cut. This foreseeable decision could prevent a further plunge of the Aussie.
Daily digest market movers: Aussie dips ahead of NFPs on Friday
- A consistent 'risk-off' mood pervades the market due to fears about a further deceleration of the Chinese economy, which significantly encumbers Australia's economic strength.
- The Australian Bureau of Statistics (ABS) showed this week that Australia's Q2 headline CPI saw an escalating 1.0% QoQ, with an acceleration to 3.8% YoY from previously being 3.6%. Concurrently, June's headline CPI is expected to have fallen to 3.8% YoY.
- Foreseeing a staunch inflation rate that greatly exceeds the 2-3% target range, the RBA seems to exercise patience with policy adjustments.
- While markets hope for a September cut of the Federal Reserve (Fed), the odds of a hike in Q4 by RBA cooled down due to the economic concerns on China but it is still expected to delay cuts until Q2 from 2024 which might limit the downside for the Aussie.
- For the remaining parts of the Friday session, traders will observe the Nonfarm Payrolls (NFP) report which is scheduled for release and could greatly affect the pair’s rhythm.
AUD/USD Technical Analysis: Bearish tendencies confirmed, room for potential corrections
The AUD/USD trading beneath the 20, 100 and 200-day Simple Moving Average (SMA) solidifies a generally bearish view. The daily Relative Strength Index (RSI) has maintained a position below the 40 mark, implying some overselling activity. The Moving Average Convergence Divergence (MACD) demonstrates flat red bars, indicating slight bearish momentum.
Yet, despite the AUD/USD pair appearing soft, the risk-sensitive Aussie may find support near the 0.6500 psychological mark with resistance standing at a high of 0.6580.
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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