Australian dollar extends losses, markets await directions

AUD/USD registered sharp declines on Monday towards 0.6640.
During the Asian session, the PBOC loan prime rate was cut by 10 basis points.
Aussie’s stability is supported by the hawkish RBA stance, which remains reluctant to embrace cuts.

In Monday's session, the Australian Dollar (AUD) presented additional losses against the USD, with AUD/USD beginning the new week around 0.6640. This loss is largely attributed to falling Copper prices and the People Bank’s of China rate cut of 10 basis points. Revised Gross Domestic Product (GDP) Q2 figures and Personal Consumption Expenditures (PCE) from the US, along with Judo PMIs from Australia, are anticipated to shape the week's trading direction.

Despite some signs of weakness in the Australian economy, stubbornly high inflation continues to prompt the Reserve Bank of Australia (RBA) to delay rate cuts, potentially limiting any further decline in the AUD. The RBA maintains its stance amongst the last central banks within the G10 countries likely to begin rate cuts, a commitment that could extend the AUD's recent gains.

Daily digest market movers: Aussie down on PBoC rate cut and falling copper prices, markets await new data to get fresh clues on the RBA’s stance

The People's Bank of China (PBoC) announced new interest rates. The 5-year interest rate was set at 3.85%, which fell short of the expected 3.95%. Similarly, the 1-year interest rate was adjusted to 3.35%, below the anticipated 3.45%.
In addition, Copper prices fell by nearly 1% on Monday which weighed on the Australian currency as Australia is a big export.
The Australian Bureau of Statistics (ABS) confirmed last week strong employment figures but that the Unemployment Rate ticked higher to 4.1%, up from 4.0%.
The reaction of the Reserve Bank of Australia (RBA) to this data will be closely watched, but as for now, the bank isn’t giving signs of easing on its hawkish stance.
Meanwhile, the market currently predicts a 50% likelihood of the RBA implementing a rate hike either in September or November, reflecting the bank's hawkish stance.
For the Federal Reserve, the chances of a rate cut in September stand at approximately 90%, near to being priced in.
However incoming data from both countries will continue shaping those expectations.

AUD/USD Technical analysis: AUD/USD plunges and remains below the 20-day SMA

While the AUD/USD pair has entered a correction period after early July's sharp gains, the main concern lies with the loss of the core support around 0.6000-0.6040. As technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) hint at weakening momentum, a deeper downside might be looming unless the pair retains the mentioned range.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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