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- Australian Dollar extends recovery post RBA decision
Australian Dollar extends recovery post RBA decision
- Australian Dollar regains ground lost in recent sessions, buoyed by RBA hawkish hold.
- Aussie might gain further ground as the RBA will probably be one of the last G10 central banks to cut interest rates.
- There won’t be any relevant economic highlights on Wednesday for Aussie.
In Wednesday's session, the Australian Dollar (AUD) continued to smile and trade with gains against its peers following the Reserve Bank of Australia’s (RBA) hawkish hold on Tuesday.
While traces of weakness persist in the Australian economy, continuing high inflation prompted the RBA to delay any prospective rate cuts. This move positions the RBA to be among the last G10 central banks to initiate rate cuts, a factor that could bring sustained gains for the Aussie. The next highlights will be in Friday’s sessions when Australia releases Judo PMI figures from June.
Daily digest market movers: AUD continues strong following RBA’s decision
- In accordance with anticipation, RBA held a restrained tone and maintained its official cash rate (OCR) at 4.35%, noting that "the Board is not ruling anything in or out."
- Governor Bullock further clarified the RBA's position during her press conference by confirming rate hike discussions and negating the consideration of rate cuts at this time.
- She emphasized the RBA's persisting concerns over inflation, suggesting a high threshold for policy easing.
- RBA maintained its observation that "inflation remains above target and is proving persistent", reiterating that "the Board expects that it will be some time yet before inflation is sustainably in the target range."
- Money market anticipates approximately 50 bps of easing by December 2025, with possibilities of rate hikes in August and September not being entirely dismissed.
- On the negative side for the Aussie, the slow momentum in the Chinese economy, particularly the persistent failure to regain strong traction post-pandemic, may pose additional challenges for the Australian currency.
Technical analysis: Bullish signals rebound but await confirmation
Technical indicators show signs of recovery with the Relative Strength Index (RSI) once again moving above 50, suggesting a potential change in momentum toward buying. The Moving Average Convergence Divergence (MACD) is illustrating a decline in red bars, which hints at an easing selling pressure.
However, for the signals to switch to buying, the AUD/USD pair needs to clear the 20-day Simple Moving Average (SMA). Until this hurdle is overcome, it cannot be seen as a confirmed buying signal.
Australian Dollar FAQs
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.
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.
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.
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.
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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