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- Australian Dollar remains subdued amid mixed economic data
Australian Dollar remains subdued amid mixed economic data
- Aussie remains weak after CPI data from Australia.
- Markets await the Fed’s decision later in the session.
- Divergences between the RBA and Fed might bail out the Aussie.
The Aussie continues to underperform on Wednesday as markets digest mixed inflation data from Australia. A slightly softer outlook from China continues to fuel concerns about the Australian economy. However, the Reserve Bank of Australia's (RBA) reluctance to introduce rate cuts due to high inflation could provide a safety net for the Aussie.
The continued high inflation pressure on the Australian economy is leading the RBA to hold off on rate cuts. Predictions suggest that the RBA will be among the last of the G10 countries to initiate a rate cut, a move that could limit further downside pressure on the Aussie.
Daily digest market movers: Aussie weakness remains after CPI data from Australia
- The prevalent 'risk-off' sentiment continues due to worries about a slowdown in the Chinese economy, significantly impacting Australia's economic stance. Attention is now focusing on the June and Q2 Consumer Price Index (CPI) figures released on Wednesday.
- The Australian Bureau of Statistics (ABS) reports that Australia's Q2 headline CPI saw an increase of 1.0% QoQ, with an acceleration to 3.8% YoY from the previous 3.6%. At the same time, June's headline CPI is projected to have fallen to 3.8% YoY.
- Considering the inflation rate considerably exceeds the 2-3% target range, the RBA is expected to remain patient with its policy changes. This cautious approach means that the swaps market predicts the first 25 bps cut coming only next summer.
- For the rest of the session, investors will eye the Federal Reserve (Fed) decision that will set the pair’s pace.
AUD/USD technical analysis: Bearish position, bullish traction is not enough to trigger a reaction
The AUD/USD's sustained trade below the 20, 100 and 200-day Simple Moving Average (SMA) confirms an overall bearish outlook. Despite indicator readings remaining firmly in negative territory, the oversold condition might prompt a correction. However, weak bullish momentum could lead to a period of sideways trading unless a major fundamental development occurs.
The key support levels have been adjusted to 0.6530 and 0.6500, with resistance levels at 0.6600 (200-day SMA), 0.6610 and 0.6630.
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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