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- Australian Dollar declines as market awaits packed week
Australian Dollar declines as market awaits packed week
- AUD/USD mildly declines to 0.6660 on Monday.
- Markets await latest RBA and Fed meeting minutes for additional guidance.
- On Monday, the US reported ISM PMIs that showed no surprises.
Monday's session recorded a moderate slip in the Australian Dollar (AUD) value against the US Dollar. As a result of persistently high inflation in Australia and some signs of softening in the US, meeting minutes from both the Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) will be closely watched this week. Labor market figures from June from the US are also due.
The Australian economy demonstrates some signs of weakness. However, the stubbornly high inflation is prompting the RBA to delay potential rate cuts. The RBA is one of the last G10 country central banks expected to issue rate cuts. This delay might further strengthen the Aussie.
Daily digest market movers: Aussie observes slight losses as market holds breath for packed week
- Australian Dollar's value saw a slight increase because of the stubbornly high inflation figures that prevent the RBA from initiating rate cuts.
- Market predicts around 40% odds of a 25-basis-point rate hike on the September 24 RBA meeting, extending to 50% leading up to November 5.
- In Australia, the May's Retail Sales data will be closely observed, which is scheduled for release on Wednesday. The expectation is for a 0.3% MoM rise compared with 0.1% in April.
- Prospect of a Fed interest rate cut in September is now at 70% and will be guided by the data in the week ahead and Powell’s speech on Tuesday.
Technical analysis: AUD/USD sways between 0.6600-0.6700
From a technical outlook, the AUD/USD pair has been trading sideways since mid-May in the 0.6600-0.6700 range. Traders on either side are struggling to dominate the direction, while indicators remain flat. The 20-day Simple Moving Average (SMA) at 0.6640 is acting as a robust support level, with further support seen below at 0.6620 and 0.6600. Descriptive resistance levels are situated at 0.6660, 0.6690, and 0.6700.
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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