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CFD Markets News and Forecasts — 18-02-2024
The People’s Bank of China (PBOC), China's central bank kept the one-year Medium-term Lending Facility (MLF) rate steady at 2.50% on Sunday. Injects 500 billion yuan vs. the 499 billion yuan in MLF maturing today.
The MLF was last cut in August 2023, from 2.65%.
Australian Dollar FAQs
What key factors drive the Australian Dollar?
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.
How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?
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.
How does the health of the Chinese Economy impact the Australian Dollar?
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.
How does the price of Iron Ore impact the Australian Dollar?
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.
How does the Trade Balance impact the Australian Dollar?
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.
New Zealand’s Business NZ Performance of Services Index (PSI) climbed into expansion territory, improving to 52.1 in January from the previous reading of 48.8, according to Business NZ on Monday.
Market Reaction
At the press time, the NZD/USD pair is up 0.04% on the day to trade at 0.6127.
About the Business NZ Performance of Services Index (PSI)
The Business NZ Performance of Services Index (PSI), released by Business NZ on a monthly basis, is a leading indicator gauging business activity in New Zealand’s services sector. The data is derived from surveys of senior executives at private-sector companies. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production or employment. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the New Zealand Dollar (NZD). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for NZD.
- AUD/USD trades in positive territory for four consecutive days near 0.6530.
- The US January PPI came in stronger than expected, rising 0.3% MoM and 0.9% YoY.
- Financial markets are betting that the RBA will cut rates in the middle of the year.
The AUD/USD pair kicks off the new week on a positive note during the early Asian session on Monday. The uptick of the pair is supported by the decline of the US Dollar (USD). AUD/USD currently trades around 0.6530, losing 0.03% on the day.
Data released by the US Labor Department on Friday showed that the Producer Price Index (PPI) in January increased by 0.3% MoM from a 0.1% decline in December. The gauge rose 0.9% in a year, also exceeding forecasts. The stronger data represent a rise in inflation pressure at the start of 2024. However, the Federal Reserve (Fed) needs more data to consider before starting to cut the interest rate.
Meanwhile, the upside of the pair might be capped by the rising tensions in the Middle East. The leader of Hezbollah, the Iran-backed militant group said it will broaden its war against Israel in the wake of recent strikes between the two sides. This, in turn, could boost a safe-haven currency like the US Dollar (USD) and act as a headwind for the AUD/USD pair.
The Reserve Bank of Australia (RBA) hasn't been expected to cut rates until after the Fed. Investors are pricing in August as the likely start for RBA rate cuts. Inflation in Australia has cooled down, but the central bank cannot attribute all of this to monetary policy success.
Looking ahead, the RBA minutes will be released on Tuesday, and the FOMC minutes for the 30-31 January meeting will be due on Wednesday. The Australian Judo Bank PMI data will be released on Thursday, and FOMC Vice Chair Jefferson is set to speak later on the same day.
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