Australian Dollar extends losses as markets await NFPs

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  • Aussie experiences some pressure after mixed Australian CPI figures.
  • Traders are keeping vigilance on the upcoming NFP data.
  • Markets are backing down on the rate hike hopes of the Reserve Bank of Australia.

The Australian Dollar continues to underperform against the US Dollar (USD), which is making a strong recovery following the Federal Open Market Committee (FOMC) policy decision. Chinese economic woes and cooling rate hike bets on the Reserve Bank of Australia (RBA) also pressure down the Aussie.

That being said the high inflation pressure continues to hold the RBA on the brink of rate cuts. Predictions propose that the RBA will be among the ultimate pockets of G10 countries to administer a rate cut. This foreseeable decision could prevent a further plunge of the Aussie.

Daily digest market movers: Aussie dips ahead of NFPs on Friday

  • A consistent ‘risk-off’ mood pervades the market due to fears about a further deceleration of the Chinese economy, which significantly encumbers Australia’s economic strength.
  • The Australian Bureau of Statistics (ABS) showed this week that Australia’s Q2 headline CPI saw an escalating 1.0% QoQ, with an acceleration to 3.8% YoY from previously being 3.6%. Concurrently, June’s headline CPI is expected to have fallen to 3.8% YoY.
  • Foreseeing a staunch inflation rate that greatly exceeds the 2-3% target range, the RBA seems to exercise patience with policy adjustments.
  • While markets hope for a September cut of the Federal Reserve (Fed), the odds of a hike in Q4 by RBA cooled down due to the economic concerns on China but it is still expected to delay cuts until Q2 from 2024 which might limit the downside for the Aussie.
  • For the remaining parts of the Friday session, traders will observe the Nonfarm Payrolls (NFP) report which is scheduled for release and could greatly affect the pair’s rhythm.

AUD/USD Technical Analysis: Bearish tendencies confirmed, room for potential corrections

The AUD/USD trading beneath the 20, 100 and 200-day Simple Moving Average (SMA) solidifies a generally bearish view. The daily Relative Strength Index (RSI) has maintained a position below the 40 mark, implying some overselling activity. The Moving Average Convergence Divergence (MACD) demonstrates flat red bars, indicating slight bearish momentum.

Yet, despite the AUD/USD pair appearing soft, the risk-sensitive Aussie may find support near the 0.6500 psychological mark with resistance standing at a high of 0.6580.

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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