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- Australian Dollar continues to struggle ahead of key Australian data
Australian Dollar continues to struggle ahead of key Australian data
- Aussie kicks off the week on soft note ahead of key data.
- Retail Sales and Inflation figures will guide market expectations.
- Economic concerns over China limit the Aussie’s upside.
The AUD saw a further decline against the USD on Monday as AUD/USD fell to 0.6545. Despite the expectations of a future rate hike by the Reserve Bank of Australia (RBA), issues with the local economy and Chinese economic woes persist, preventing any significant upward movement.
As the Australian economy shows signs of weakness, the persistent high inflation has prompted the Reserve Bank of Australia (RBA) to delay rate cuts. As per the current forecasts, the RBA stands to be among the last G10 nations to introduce a rate cut, potentially extending the gains of the AUD, but the economic concerns also push the currency down.
Daily digest market movers: Aussie looks weak ahead of Inflation and Retail Sales data
- The risk-off sentiment continues to dominate with Australia's economic climate being influenced by concerns over Chinese economic stress.
- This week, investors will be eyeing Australian June Q2 CPI data, due to be released on Wednesday.
- For Q2, the headline CPI is expected to match Q1's rise of 1.0% QoQ and accelerate to 3.8% YoY from 3.6% in Q1. Meanwhile, the June headline CPI is anticipated to fall to 3.8% YoY.
- With the inflation rate still above the 2-3% target range, the RBA is unlikely to rush toward a policy change. The swaps market predicts stability for the rest of the year with the first significant 25 bps cut expected next summer.
- Tuesday will also see Q2's Retail sales data release. Retail Sales volume is expected to show a less severe decline of 0.2% QoQ in Q2, compared to 0.4% in Q1.
AUD/USD Technical analysis: Bearish outlook underpins, the pair lies below major SMAs
The AUD/USD's movement below the 20,100 and 200-day Simple Moving Averages (SMAs) signals concern, indicating a probable persistence of the downward trend. In July, the pair recorded an extensive nine-day losing streak and fell nearly 3.50%.
Indicator signals are deeply entrenched in the negative, but the oversold scenario may stimulate a correction. However, the bulls' momentum remains weak, and technicals suggest a sideways trade period rather than an upsurge, barring any fundamental catalysts.
Key support levels line up at 0.6530 and 0.6500, while resistance levels lie 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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