Australian Dollar advances to a fresh five-month high on improved risk appetite

Australian Dollar posts fresh five-month high on subdued Greenback.
Australian central bank could be hawkish in early 2024 as inflation remains solid.
China's Jan-Nov Industrial Profits (YoY) declined by 4.4%.
US Dollar faces challenges on speculation of the Fed going softer in the upcoming year.

The Australian Dollar (AUD) moves upward on Wednesday on improved risk appetite while the US Dollar (USD) could show signs of weakness in the speculation on a dovish stance of the Federal Reserve (Fed) on interest rates. The AUD/USD pair trades below its recent high of 0.6840, a mark untouched for nearly five months.

Australia’s central bank reflects a hawkish outlook, driven by robust inflation and stable housing prices, contributing to the resilience of the Australian Dollar. The upcoming year might witness a tug-of-war between expectations of rate cuts and the Reserve Bank of Australia's (RBA) resistance. With the latest RBA forecasts approaching the upper boundary of the 2-3% inflation target by the close of 2025, the RBA may still be open to additional deliberation.

China's year-on-year Industrial Profits for January to November registered a decline of 4.4%, indicating a slowdown and highlighting the need for additional policy support from Beijing to bolster growth in the world's second-largest economy. China takes center stage in shaping the global economic landscape in 2024, marked by stable inflation and low borrowing costs. The world is keenly observing as the global economy gains traction, particularly with the prospect of economic stimulus from China. Such developments could sway the Reserve Bank of Australia (RBA) to maintain its hawkish stance, guided by trade relations between the two countries.

The US Dollar Index (DXY) is encountering downward pressure amid growing speculations of potential easing by the US Federal Reserve (Fed). This sentiment is further exacerbated by the decline in US Treasury yields, adding to the factors undermining the strength of the Greenback.

Former Dallas Federal Reserve President Robert Kaplan shared his insights with the media on Tuesday. Kaplan emphasized the Federal Reserve's previous error of maintaining excessive accommodation for an extended period, even as the economy showed signs of improvement. He believed that the central bank is cautious not to repeat the same mistake on the opposite end, avoiding a scenario where it becomes overly restrictive.

Daily Digest Market Movers: Australian Dollar rises on hawkish RBA, weaker Greenback

RBA Private Sector Credit (MoM) demonstrated a 0.4% increase in November, surpassing the previous rise of 0.3%. However, the Year-over-Year data indicated a decrease of 4.7%, compared to the previous 4.8% rise.
RBA highlighted the examination of additional data to assess the balance of risks before deciding on future interest rates in its recent Meeting Minutes.
US Housing Price Index (MoM) contracted to 0.3% from 0.7% prior, falling short of 0.5% expectations in October.
US Bureau of Economic Analysis (BEA) reveals that the Core Personal Consumption Expenditures - Price Index (YoY) grew at 3.2% in November, falling short of the 3.3% expectations and 3.4% prior. While the MoM data showed consistency at 0.1% against the market expectation of 0.2%.
US Gross Domestic Product Annualized grew at a rate of 4.9% in Q3, slightly below the expected consistency of 5.2%.

Technical Analysis: Australian Dollar trades below 0.6850

The Australian Dollar hovers around 0.6830 on Wednesday, slightly below its five-month high of 0.6840. The prevailing bullish sentiment suggests a potential for the AUD/USD pair to approach the key resistance at the major level of 0.6850. On the downside, support levels are identifiable at the psychological level of 0.6800, followed by the seven-day Exponential Moving Average (EMA) at 0.6785. A breach below this crucial support zone could lead the AUD/USD pair towards the psychological support at 0.6700 before encountering the 23.6% Fibonacci retracement at 0.6693.

AUD/USD: Daily Chart

Australian Dollar price today

The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the strongest against the Japanese Yen.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.03%	0.02%	0.01%	-0.12%	0.09%	0.02%	-0.04%
EUR	0.03%		0.03%	0.04%	-0.09%	0.11%	0.05%	-0.01%
GBP	-0.01%	-0.06%		-0.02%	-0.13%	0.06%	0.00%	-0.06%
CAD	0.00%	-0.03%	0.01%		-0.12%	0.10%	0.02%	-0.05%
AUD	0.12%	0.10%	0.13%	0.12%		0.20%	0.14%	0.08%
JPY	-0.09%	-0.14%	-0.07%	-0.11%	-0.22%		-0.07%	-0.15%
NZD	-0.02%	-0.05%	0.00%	-0.03%	-0.14%	0.06%		-0.06%
CHF	0.04%	0.02%	0.07%	0.04%	-0.07%	0.13%	0.06%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

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