Australian Dollar closes the week strong, at highs since January

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  • Rising US Unemployment figures had USD facing selling pressure.
  • Australia reported mixed housing data on Friday.
  • Monterey divergences between the Fed and RBA might push the pair up further.

The Australian Dollar (AUD) holds its ground against the USD on Friday, which weakened following soft US Nonfarm Payrolls (NFP) figures but stands at its highest level since early January at 0.6740.

The Reserve Bank of Australia (RBA) might be one of the final G10 central banks to initiate cuts, which should continue to support the Aussie amid these conditions. Despite signs of a weakening Australian economy, persistent inflation prompts the RBA to remain hawkish, and encouraging Retail Sales data reported earlier in the week depicts a strong economic outlook.

Updated daily market movers: AUD strength holds despite sluggish housing market

  • Housing loan commitments in Australia for March have risen up to 3.1% MoM, beating the expected 1.0% and a revised 1.9% from February.
  • However, this may signal a boost in house prices impacting average loan sizes, rather than an increase in demand for domiciles.
  • Current consumer sentiment surveys point toward sluggish buying sentiment in terms of housing.
  • Across the Pacific, US NFPs revealed a rise of 206K in June, exceeding the market expectation of 190K. This followed a revised 218K increase in May.
  • Nevertheless, these figures have not done much to bolster the USD, as the Unemployment Rate in the US has slightly risen to 4.1% from 4%.
  • Wage inflation, measured by the change in the Average Hourly Earnings, declined to 3.9% YoY, widely expected by markets.
  • On the RBA side, markets indicate a marginal 10% probability of a rate hike from the RBA before the end of the year.
  • On the Fed’s side, the market is fully pricing in two rate cuts by the end of the year, subject to the ongoing labor market data and inflation figures.

Technical analysis: AUD/USD maintains momentum, bullish outlook continues

The AUD/USD pair shows no signs of losing momentum, backed by the deep positive territory of technical indicators of the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). As the pair reaches its January highs, the bullish outlook is more promising. However, traders should monitor if the mentioned indicators start to flag overbought conditions.

The next bullish targets are the resistances at 00.6750 and 0.6800. Concurrently, the support levels to watch are 0.6670, 0.6650 and 0.6630.

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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