Australian Dollar down after US presidential elections, RBA hawkishness might limit losses
- AUD/USD falls after Donald Trump wins the US presidential election.
- Republican victory raises concerns about trade war with China, weighing on AUD.
- RBA's hawkish stance might limit the AUD losses
The AUD/USD pair plunged 1.25% to 0.6555 on Wednesday after Donald Trump's US presidential election victory sparked enthusiasm for the US Dollar. Fears of a trade war with China, fueled by the Republican victory, weighed on the Australian Dollar.
However, the Reserve Bank of Australia's (RBA) hawkish stance might limit the AUD losses as this week Governor Michelle Bullock highlighted the need to maintain rates at restrictive levels to control inflation.
Daily digest market movers: Australian Dollar declines on Trump’s victory
- AUD/USD plunged over 130 pips due to increased USD demand driven by Trump's election victory projections.
- US Dollar Index (DXY) surged to a four-month high after exit polls indicated Republican dominance.
- Republicans are poised to control the House and Senate, raising concerns over tariffs and trade wars with China.
- Deficit spending fears and reduced rate cut expectations boosted US Treasury yields, supporting the USD.
- That being said, RBA's hawkish stance, emphasizing the need for restrictive interest rates, might support the AUD.
- RBA Governor Bullock highlighted the importance of maintaining high interest rates to combat inflationary pressures.
- Signs of China's economic recovery limited losses for the Aussie, leading to intraday short-covering.
AUD/USD technical outlook: Pair rides on bearish momentum, recovery halted
The Relative Strength Index (RSI) is in the negative area and declining sharply, suggesting that selling pressure is rising. The Moving Average Convergence Divergence (MACD) is also bearish, with the histogram flat and red. Overall, the technical outlook is bearish, and the pair could potentially test the 0.6450 support level if the bearish momentum continues.
The AUD/USD pair's inability to break above the convergence of the 200 and 20-day Simple Moving Averages (SMAs) at approximately 0.6630 signaled a bearish reversal. This rejection suggests that the upward momentum seen in recent weeks has been exhausted, and the pair is poised for further declines.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
