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- Australian Dollar faces pressure due to risk-off sentiment and a stronger US Dollar
Australian Dollar faces pressure due to risk-off sentiment and a stronger US Dollar
- Australian Dollar struggles to retrace the recent losses.
- RBA’s decision to keep policy rates unchanged might exert pressure on the Aussie Dollar.
- Higher US Treasury yields bolster the Greenback, coupled with upbeat US employment data.
The Australian Dollar (AUD) attempts to snap a two-day losing streak on Wednesday. However, the AUD/USD pair is under pressure due to risk-off sentiment and stronger US Dollar (USD). Additionally, the pair weakened after the interest rate decision by the Reserve Bank of Australia (RBA) on Tuesday.
Australia's central bank opted to maintain the status quo, leaving the current interest rate unchanged at 4.10% in the recent policy meeting. This decision might exert pressure on the Aussie pair. Nevertheless, there is a possibility of a rate hike, with expectations pointing toward a peak of 4.35% by the end of the year. This projection aligns with the persistent elevation of inflation above the target.
The US Dollar Index (DXY) climbed to an 11-month high on the back of the upbeat US employment data and higher US Treasury yields. US JOLTS Job Openings exceeded expectations, leading to an increase in US yields. The 10-year US Treasury yield reached its highest since 2007.
Additionally, market caution regarding the US Federal Reserve's (Fed) interest rate trajectory is contributing to the positive sentiment surrounding the Greenback.
Daily Digest Market Movers: Australian Dollar weakens due to stronger US Dollar, market caution
- RBA chose to maintain the Official Cash Rate (OCR) at 4.10%, aligning with widespread expectations, which might exert pressure on the Aussie Dollar.
- Michele Bullock, the newly appointed governor of the RBA, emphasized in her inaugural monetary policy statement that there might be a need for additional tightening of monetary policy.
- Bullock mentioned that recent data align with the return of inflation to the target range. While inflation in Australia has peaked, it remains elevated and is expected to persist for a while.
- The 10-year US Treasury yield reached to 4.81% on Tuesday, the highest level since 2007.
- US JOLTS Job Openings improved to 9.61M in August from the previous reading of 8.92M. The market was expecting a decline to 8.80M figures.
- Cleveland Federal Reserve President Loretta Mester stated on Tuesday that she is likely to favor an interest rate hike at the next meeting if the current economic situation holds.
- Atlanta Fed President Raphael Bostic shared his perspective on the Federal Reserve's policy outlook, stating, "I am not in a hurry to raise, not in a hurry to reduce either." He emphasized a patient approach, indicating that there is no urgency for further actions at the moment.
- Traders await the US employment data, with the release of the ADP report on Wednesday and the Nonfarm Payrolls on Friday. Australia’s Trade Balance will also be eyed on Thursday.
Technical Analysis: Australian Dollar hovers around 0.6300, November's low emerges as support
Australian Dollar trades around 0.6310 on Wednesday. The major level at 0.6300 emerges as the immediate support, followed by November's low at 0.6272. On the upside, the 21-day Exponential Moving Average (EMA) at 0.6402 appears to be a key barrier, following the 23.6% Fibonacci retracement at 0.6464 level.
AUD/USD: Daily Chart
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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