Australian Dollar strong as markets await RBA decision

AUD/USD surges higher in light of hawkish RBA and uncertainty over US election.
US Dollar weakens on speculation of Kamala Harris victory and Fed's dovish rate cut bets.
US Nonfarm Payrolls disappointed, missing estimates and casting doubt on Fed's aggressive rate cut path.

The AUD/USD surged higher on Monday, rising by 0.70% to 0.6600 amid expectations of a hawkish Reserve Bank of Australia (RBA) policy decision and uncertainty surrounding the US presidential election.

Recently, the AUD/USD has declined due to a US Dollar recovery and concerns over China's economy. The RBA is expected to maintain a hawkish stance, supporting the AUD in the long term. Market expectations for an RBA rate cut are low, while investors are confident of interest rate cuts by the Federal Reserve (Fed) later this week and again in December.

Daily digest market movers: Australian Dollar rises with US election in sight

The US Dollar (USD) fell on Monday as polls suggested a tight race between Vice President Kamala Harris and former President Donald Trump in Iowa.
A Trump victory could boost the USD due to expected protectionist policies and higher inflation.
A Harris win would likely continue current policies, benefiting riskier currencies.
The Fed is expected to cut interest rates by 25 basis points (bps) on Thursday, influencing the USD.
On the other hand, the RBA is expected to hold interest rates steady.
The RBA’s outlook on economic activity and inflation will also be closely watched as Australian reports recently showed mixed signs but with inflation still above the bank’s target.

AUD/USD technical outlook: Bullish signs emerge, pair might have hit bottom

The Relative Strength Index (RSI) is in the negative area at 41, but the RSI slope is rising sharply, suggesting that buying pressure is picking up the pace. On the other hand, the Moving Average Convergence Divergence (MACD) is flat and red, indicating that selling pressure is weakening.

The AUD/USD pair has resumed its upward trajectory, driven by a recovery in technical indicators from oversold levels. This recovery suggests that the recent sell-off may have been excessive and that buyers are re-entering the market. The pair had previously hit its lowest point since August, indicating that the downtrend may be losing momentum.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

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.

How does inflation data impact the value of the Australian Dollar?

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.

How does economic data influence the value of the Australian 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.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

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.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

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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