- The Australian Dollar gains ground in Monday’s Asian session.
- China’s NBS Manufacturing PMI rose to 50.5 in March; Non-Manufacturing PMI climbed to 50.8.
- The RBA interest rate decision and US ISM Manufacturing PMI will be the highlights on Tuesday.
The Australian Dollar (AUD) recovers some lost ground on Monday, bolstered by the encouraging Chinese economic data. The latest data released on Monday showed that China’s NBS Manufacturing Purchasing Managers’ Index (PMI) rose to 50.5 in March, compared to 50.2 in February. The reading came in line with the market consensus. Meanwhile, the NBS Non-Manufacturing PMI improved to 50.8 in March versus 50.4 prior and stronger than the 50.5 expected.
However, the upside for the pair might be limited due to global trade concerns ahead of a planned announcement on Wednesday by US President Donald Trump on reciprocal tariffs. Looking ahead, investors will closely monitor the Reserve Bank of Australia (RBA) interest rate decision on Tuesday. The Australian central bank is set to keep interest rates unchanged at the April meeting as it waits out an election campaign fought on cost-of-living issues and girds for the economic impact of a US-driven upheaval in global trade. On the US docket, the ISM Manufacturing PMI for March will be released later on Tuesday.
Australian Dollar gains momentum ahead of RBA rate decision
- Economists surveyed by Bloomberg anticipate the RBA will stand pat at 4.1% and stick with a cautious stance after easing for the first time in four years last month.
- The US Personal Consumption Expenditures (PCE) Price Index, rose 2.5% YoY in February, the US Bureau of Economic Analysis reported on Friday. This reading matched the market expectation and January’s reading.
- The core PCE Price Index, which excludes volatile food and energy prices, jumped 2.8% on a yearly basis in February, above the estimation and January’s increase of 2.7% (revised from 2.6%). On a monthly basis, the PCE Price Index and the core PCE Price Index increased 0.3% and 0.4%, respectively.
- The US Personal Income increased by 0.8% on a monthly basis in February, while Personal Spending rose by 0.4% during the same reported period.
- Swaps traders continued to price in about two quarter-point rate cuts this year, with the first seen coming in July, according to the CME FedWatch tool.
- San Francisco Fed President Mary Daly said on Friday that she expects two rate cuts this year, but with robust economic indicators, policymakers can hold off on cutting rates until they evaluate how businesses adapt to tariff costs.
Australian Dollar remains stuck within a symmetrical triangle pattern, but bearish outlook remains in place
AUD/USD trades in positive territory on the day. The pair remains capped within the symmetrical triangle pattern on the daily timeframe. The bearish bias remains intact, characterized by the price holding below the key 100-day Exponential Moving Average (EMA). Nonetheless, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) hovers around the midline, indicating neutral momentum in the near term.
The first upside barrier for AUD/USD emerges at 0.6330, the high of March 26. A strong move above this level could see a rally to 0.6355, the 100-day EMA. Further north, the next hurdle is seen at 0.6375, the upper boundary of the symmetrical triangle pattern.
On the downside, the low of March 24 at 0.6262 acts as an initial support level for the pair. If bearish momentum builds under the mentioned level, it could trigger more selling and drag AUD/USD down toward 0.6225, the lower limit of the triangle pattern. The additional downside filter to watch is 0.6186, the low of March 4.
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.
Read the full article here