- AUD/USD started the week on the right foot on a quiet Monday.
- Australia will release Q2 GDP data on Wednesday, which will be key.
- RBA Governor Bullock is expected to reiterate hawkish guidance on Thursday despite market expectations of a rate cut in December.
The AUD/USD gained 0.30% in Monday's session, advancing to 0.6790. The pair is trading slightly higher on a quiet Monday as markets look ahead to key US labor market data this week, culminating in the Nonfarm Payrolls (NFP) report on Friday. On the domestic front, Gross Domestic Product (GDP) data and Reserve Bank of Australia (RBA) Governor Bullock's speech on Thursday are the key events to watch.
The Australian economic outlook remains uncertain, with both positive and negative indicators. The RBA has taken a hawkish stance due to elevated inflation, leading financial markets to anticipate only a modest 25 basis points of easing in interest rates by 2024.
Daily digest market movers: Australian Dollar gains amid quiet trading, anticipation of key data
- Australia's Q2 GDP data will be released on Wednesday, with expectations of a 0.2% QoQ growth (vs. 0.1% in Q1) and a 0.9% YoY rate (vs. 1.1% in Q1).
- However, recent data on retail sales and private capital expenditure suggest downside risks to the GDP forecast.
- RBA Governor Bullock will speak on Thursday, likely reiterating the RBA's hawkish stance. Markets will look for clues on whether the bank is open to cutting or not this year.
- Despite the RBA's hawkish guidance, market expectations point to an 80% chance of a rate cut in December, reflecting concerns about slower economic growth.
AUD/USD technical outlook: Momentum flattens despite gains
The Relative Strength Index (RSI) rose back to 64 as the Moving Average Convergence Divergence (MACD) is green and flat, suggesting that the momentum is strong. The pair is approaching a resistance level at 0.6800, and if it breaks above this level, it could continue to rise toward 0.6830-0.6850. Support levels can be found at 0.6760 and 0.6740.
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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