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- Australian Dollar maintains momentum, markets respond to US inflation data
Australian Dollar maintains momentum, markets respond to US inflation data
- AUD/USD remains at highest level since January near 0.6800.
- Hot PPI data didn’t stop the pair in its upward trend.
- Monetary policy divergence between RBA and Fed stir the pair.
The Australian Dollar (AUD) upheld its positive trajectory against the USD in Friday's session, rising by 0.30% to 0.6780. The AUD resumed its gains with market participants adjusting their stakes on the Federal Reserve (Fed) after the release of US inflation figures. Hot Producer Price Index (PPI) figures form the US didn’t trigger a recovery in the Greenback.
The Reserve Bank of Australia (RBA) is poised to be among the last G10 nations' central banks to initiate rate cuts, a factor that could extend the AUD's gains.
Daily market movers: AUD may extend gains as RBA delays cuts and markets grow confident in a more dovish Fed
- On the economic data front, the Producer Price Index (PPI) for final demand in the US rose 2.6% YoY in June, according to data published by the US Bureau of Labor Statistics on Friday.
- This result was higher than the forecasted 2.3%, surpassing the previous 2.2% rise in May. Core PPI also exceeded market expectations at 3%.
- However, sentiment data from the University of Michigan came in below expectation at 66.0, compared to the predicted 68.5 and the previous 68.2.
- CME Fedwatch Tool predicts more than 80% chance for 25 bps cut in September.
- On the other hand, speculation is growing that RBA might delay the global rate-cutting cycle or even raise interest rates again as a result of high inflation in Australia. This view compels RBA to maintain its hawkish stance.
- Furthermore, China, one of Australia's closest trade partners, has announced its Trade Balance data for June showing a trade surplus of $99.05 billion, a significant increase from the previous figure of $82.62 billion.
Technical analysis: AUD/USD maintains highs, signs of looming correction
The AUD/USD maintains a bullish stance, retaining the heights reached in January. However, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicate that they are nearing overbought terrain, suggesting a possible impending correction.
Buyers are looking to maintain the 0.6760-0.6780 range and surpass the 0.6800 area if possible. Conversely, the 0.6670, 0.6650 and 0.6630 levels are set as support ranges in case of a correction.
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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