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- Australian Dollar down on USD recovery, RBA’s hawkish stance and upbeat PMIs buffer the downside
Australian Dollar down on USD recovery, RBA’s hawkish stance and upbeat PMIs buffer the downside
- AUD/USD experienced a drop, adjusting to 0.6950, because of a USD recovery.
- Strong Australian PMIs might limit the pair's downside.
- The persistent hawkish views of the RBA keep backing the Aussie versus its peers.
On Thursday, the AUD/USD is seeing a moderate decline, retracing some of the gains after the approximately 2% rally from the last sessions. The narrative of monetary policy divergence between the Federal Reserve (Fed), contemplating a less assertive approach toward interest rates, and the steadfast position of the Reserve Bank of Australia (RBA) preserves the push on the pair, putting the Aussie ahead of the Greenback. However, the USD staged a recovery on Thursday ahead of Friday’s speech from Jerome Powell at the Jackson Hole Symposium.
In spite of a mixed Australian economic outlook, underlined by strong August PMIs, and the RBA's hawkish stance ascribed to high inflation, markets are anticipating a minimal 25 basis points of easing for 2024, upholding a solid stand for the Aussie.
Daily digest market movers: Aussie's rally slackens despite strong PMIs, policy divergences to limit the losses
- Softening US labor market data and soft S&P PMIs suggest that the Fed may follow a less assertive footing, leading to a potential depreciation of the USD.
- In contrast, preliminary August PMIs from Australia exhibit a stout picture of the economy.
- Manufacturing rose to 48.7 in contrast to 47.5 in July, Services scaled to 52.2 versus 50.4 in July, and the composite climbed to 51.4 in comparison to 49.9 in July. This development corroborates the RBA's hawkish policy disposition.
- Despite promising Australian data, the path of the pair will continue to be guided by incoming data from both countries.
- In the meantime, markets are extremely confident about a September cut by the Fed in September.
AUD/USD technical outlook: AUD/USD upsurge prevails with lower but firm momentum
Technical analysis suggests that the AUD/USD pair has persisted in its upward trajectory over the sessions, with a significant volume increase reinforcing a positive outlook. However, the price action suggests a consolidation of those gains.
The Relative Strength Index (RSI), which showcases market momentum, has risen slightly from previous sessions. Currently, at 59, the RSI suggests a slightly bullish sentiment and ongoing bullish pressure beneath the overbought level of 70, which was hit earlier in the week. Furthermore, the Moving Average Convergence Divergence (MACD) indicator aligns with this bullish tone with steady green bars.
Indeed, the AUD/USD pair appears to have consolidated above the 0.6700 support level, which now serves as a significant area for the pair. The immediate critical resistance comes in around the recent high of 0.6760-0.6800.
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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