Australian Dollar gains ground due to hawkish sentiment surrounding RBA

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  • The Australian Dollar recovers losses as high inflation prompts the RBA to delay rate cuts.
  • Australia’s May inflation has sparked warnings that the RBA might raise the cash rate to 4.6% in September.
  • The US Dollar may struggle as slowing US employment growth could lead the Fed to reduce rates sooner.

The Australian Dollar (AUD) recovers losses despite improved risk aversion on Monday. However, the renewed demand for the US Dollar (USD) puts pressure on the AUD/USD pair. The AUD receives support as persistent high inflation, stronger Retail Sales, and Services PMI prompt the Reserve Bank of Australia (RBA) to delay potential rate cuts.

The RBA’s June Meeting Minutes indicated that policymakers emphasized the need to stay alert to upside inflation risks. The policymakers noted that a significant rise in prices might necessitate substantially higher interest rates. Although rates were steady in June, May’s CPI, which surprisingly increased to 4.0% from the previous 3.6%, prompted warnings that the RBA might raise the cash rate to 4.6% in September.

The US Dollar (USD) may face challenges as US employment growth slowed in May, according to data released on Friday. While Nonfarm Payrolls (NFP) exceeded market expectations in June, the growth was slower compared to May’s increase. Additionally, the Unemployment Rate edged higher in June. This could lead traders to speculate that the Federal Reserve (Fed) might reduce interest rates sooner rather than later.

The CME’s FedWatch Tool shows that rate markets are pricing in an almost 70.7% probability of a rate cut in September, up from 64.1% a week earlier.

Daily Digest Market Movers: Australian Dollar declines due to risk aversion

  • US Nonfarm Payrolls (NFP) increased by 206,000 in June, following a rise of 218,000 in May. This figure surpassed the market expectation of 190,000.
  • The US Unemployment Rate edged up to 4.1% in June from 4.0% in May. Meanwhile, Average Hourly Earnings decreased to 3.9% year-over-year in June from the previous reading of 4.1%, aligning with market expectations.
  • According to the Australian Bureau of Statistics on Thursday, Australia’s trade surplus for May was A$5,773 million ($3,868 million), lower than the expected A$6,678 million and down from the previous reading of A$6,548 million.
  • Australia’s Retail Sales, a measure of the country’s consumer spending, increased by 0.6% MoM in May, up from the previous month’s 0.1% rise. This figure exceeded market expectations of a 0.2% increase.
  • Judo Bank’s Australia Services PMI increased to 51.2 MoM, up from the previous month’s 51.0, surpassing the forecasted drop to 50.6. Meanwhile, the Composite PMI rose to 50.7 MoM, compared to 50.6 in the previous month.
  • China’s Services Purchasing Managers’ Index (PMI) fell from 54.0 in May to 51.2 in June, according to the latest data released by Caixin on Wednesday. The market forecast was for a 53.4 figure in the reported period.
  • Federal Reserve Bank of Chicago President Austan Goolsbee stated on BBC Radio on Wednesday that bringing inflation back to 2% will take time and that more economic data are needed. However, on Tuesday, Fed Chair Jerome Powell said that the central bank is getting back on the disinflationary path, per Reuters.

Technical Analysis: Australian Dollar holds position around 0.6750

The Australian Dollar trades around 0.6740 on Monday. The analysis of the daily chart shows that the AUD/USD pair breaks below a rising wedge, indicating a potential bearish reversal. Additionally, the 14-day Relative Strength Index (RSI) consolidates slightly below the 70 level. A downward move in the RSI would suggest the asset may undergo a correction.

The AUD/USD pair is likely to test the lower boundary of the rising wedge around 0.6755, followed by the psychological level of 0.6800 near the upper boundary of the wedge.

On the downside, the AUD/USD pair may navigate the region around the 50-day Exponential Moving Average (EMA) at 0.6639.

AUD/USD: Daily Chart

Australian Dollar PRICE Today

The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the strongest against the Swiss Franc.

  USD EUR GBP JPY CAD AUD NZD CHF
USD   0.07% 0.01% -0.11% -0.08% -0.04% -0.17% -0.06%
EUR -0.07%   0.14% 0.14% 0.16% 0.04% 0.09% 0.18%
GBP -0.01% -0.14%   -0.04% 0.04% -0.10% -0.03% 0.04%
JPY 0.11% -0.14% 0.04%   0.03% 0.09% 0.10% 0.09%
CAD 0.08% -0.16% -0.04% -0.03%   -0.00% -0.10% 0.01%
AUD 0.04% -0.04% 0.10% -0.09% 0.00%   0.05% 0.14%
NZD 0.17% -0.09% 0.03% -0.10% 0.10% -0.05%   0.09%
CHF 0.06% -0.18% -0.04% -0.09% -0.01% -0.14% -0.09%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).

RBA FAQs

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.

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