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- Australian Dollar declines as it approaches critical level
Australian Dollar declines as it approaches critical level
- AUD/USD declines amidst renewed selling pressure, testing 0.6700 support.
- Market sentiment implies a 55% probability of a 25-basis-point rate cut by the RBA this year.
- The fragile economic situation in China also weighs on the Aussie.
The AUD/USD pair declined by 0.40% to 0.6705 in Tuesday's session as the Australian Dollar faced renewed selling pressure. The US Dollar has regained strength, moving toward two-month highs due to increased risk aversion and ongoing concerns about China.
The main mover of the Aussie lately is the economic situation in China, which seems to be unnerving investors and hence pushing them to seek refuge in the US Dollar. In the meantime, markets seem to be confident of the Reserve Bank of Australia (RBA) cutting 25 bps by year’s end.
Daily digest market movers: Australian Dollar sinks on strong USD and Chinese economic woes
- The bearish momentum for the Australian Dollar was caused by an irresolute US Dollar and skepticism about China's stimulus measures.
- A decline in copper prices also contributed to the downward pressure on the Australian Dollar, while iron ore prices remained mostly unchanged.
- Deflationary concerns deepened in China based on September data, raising doubts about the effectiveness of its stimulus efforts.
- Market sentiment reflects a 55% probability of a 25 bps rate cut by the RBA by year-end.
AUD/USD technical outlook: Bearish momentum intensifies, buyers must defend 0.6700
The AUD/USD currency pair has declined in recent sessions with a drop of 0.42% on Tuesday. This decline is in line with several technical indicators. The Relative Strength Index (RSI), which measures the strength of buying and selling pressure, is currently at 36, indicating that the selling pressure is stronger. The RSI is also declining sharply, suggesting that the selling pressure is intensifying.The Moving Average Convergence Divergence (MACD) is another indicator that suggests that bearish pressure is rising. Overall, the technical outlook for the AUD/USD is bearish, suggesting that the pair could continue to fall in the near term. Key support levels to watch include 0.6700, 0.6680 and 0.6650, while resistance levels to watch include 0.6750, 0.6760 and 0.6780.
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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