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- Australian Dollar down, RBA's hawkish stance and Chinese inflation data to limit losses
Australian Dollar down, RBA's hawkish stance and Chinese inflation data to limit losses
- AUD/USD slightly retreats, settling near 0.6575 on Friday.
- RBA reiterates its hawkish stance, contributing to a buoyant AUD.
- Investors digest Chinese inflation reported during the European session.
The AUD/USD pair witnessed a minor setback at 0.6575 during Friday's session, a modest descent of 0.30%. That being said, the Reserve Bank of Australia's (RBA) unwavering hawkish discourse and stronger Chinese inflation figures might limit the downside for the Aussie.
Given the complex Australian economic prospect and the RBA’s hawkish inclination due to elevated inflation, markets persistently price just a 25 bps easing in 2024.
Daily digest market movers: RBA's resolute hawkish tone and robust Chinese inflation data might favor the AUD
- The Reserve Bank of Australia maintained the rates, echoing that "the board is not dismissing any possibility". Notably, the Bank highlighted the importance of remaining alert toward conceivable inflation risks, implying no hastened policy reversals.
- On Thursday, RBA Governor Michele Bullock reiterated the reduced requirement for rate cuts, adopting a hawkish tone and asserting that the board "will not hesitate to lift rates if it needs to" to challenge sustained inflation.
- On the data front, emphasizing Friday's inflation report, the National Bureau of Statistics announced consumer prices in China rose by 0.5% in July YoY vs. the forecasts of 0.3%.
- Additional details revealed that the headline CPI soared 0.5% in July, the highest since February, moderating concerns about a profound economic slump in China.
- In that sense, while good news comes from Australia, the AUD’s downside is limited.
AUD/USD technical outlook: Pair faces strong resistance at the SMA convergence around 0.6000
AUD/USD's price action over the previous week reflects that the bulls are encountering substantial resistance around the 0.6600 level, which coincides with the convergence of the 20,100 and 200-day Simple Moving Averages (SMA). However, support has been persistently holding strong at 0.6500.
The Relative Strength Index (RSI) has been stagnant around the neutral zone, oscillating values near 49, indicating neither a significant buying or selling pressure. The large spike from nearly 30 to 49 this week suggests that the buyers made a stride toward mounting traction.
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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