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- Australian Dollar rebounds, RBA rate cut prospects intensify
Australian Dollar rebounds, RBA rate cut prospects intensify
- Aussie finds some relief after mixed Australian PPI figures.
- Traders are keeping vigilance on job data disappointment from the US.
- Markets adjust their stance on the Reserve Bank of Australia's monetary policy and now expect a cut in 2024.
The Australian Dollar shows a minor recovery against the US Dollar (USD), which is experiencing a sharp drop after disappointing US jobs data. That being said, economic frailties in Australia and increasing rate cut expectations for the Reserve Bank of Australia (RBA) provide a limited upside for the Aussie.
Despite high inflation, weaknesses in Australian economic activity have caused markets to amend their expectations from a rate hike to a rate cut from the RBA by the end of the year. Predictions now propose that the RBA will introduce a cut to tackle economic sluggishness, which could potentially limit further escalation for the Aussie.
Daily digest market movers: Aussie gains ground despite increased RBA cut odds
- Australia's Q2 Producer Price Index (PPI) unveiled this week displayed an increase of 4.8% YoY, a substantial leap from Q1's 4.3%.
- This continued acceleration, hitting its highest point since Q1 of 2023, places the RBA under scrutiny to respond accordingly.
- With the market attributing an 80% chance of an RBA cut by year-end, the Aussie’s upside is limited.
- Across the Pacific, US Nonfarm Payrolls increased by 114K, far less than the predicted 175K.
- The Unemployment Rate climbed to 4.3% as compared to June's 4.1%, and the Labor Force Participation Rate noted a marginal increase to 62.7% from the previous 62.6%.
- The Average Hourly Earnings report showed a drop from 3.8% to 3.6% YoY, which has affected the currency market adversely by adding weight to USD.
- In light of this data, the Federal Reserve (Fed) is expected to initiate interest rate reduction measures starting in September, with a 90% chance priced in according to the CME FedWatch Tool.
AUD/USD Technical Analysis: Bearish tendencies challenged, still room for potential corrections
The AUD/USD trading beneath the 20, 100 and 200-day Simple Moving Average (SMA) prolongs predominantly bearish sentiment. The daily Relative Strength Index (RSI) saw values between 30 and 37 during the past week, reinforcing the bearish perspective. The Moving Average Convergence Divergence (MACD) maintains flat red bars, signaling enduring bearish momentum.
However, the AUD/USD pair seems to exhibit resilience near the 0.6480 mark, indicating a potential key support level. Conversely, resistance is speculated to be around the 0.6560-0.6570 zone, where selling pressure has so far capped the rally.
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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