The Australian Dollar (AUD) prolongs a two-week-old uptrend against a broadly weaker US Dollar (USD) and touches a fresh high since November 13 during the Asian session on Wednesday. The initial market reaction to the disappointing Australian economic growth figures turns out to be short-lived in the wake of diminishing odds for more policy easing by the Reserve Bank of Australia (RBA).
Apart from this, a generally positive tone around the equity markets is seen as another factor acting as a tailwind for the risk-sensitive Aussie. The USD, on the other hand, languishes near its lowest level in over two weeks amid the growing acceptance that the Federal Reserve (Fed) will cut interest rates next week. This contributes to the bid tone surrounding the AUD/USD pair and favors bullish traders.
Australian Dollar bulls retain control amid the divergent RBA-Fed policy expectations
- The Australian Bureau of Statistics reported this Wednesday that the economy grew by 0.4% during the July-September period, down from the 0.6% rise seen in the second quarter. The annual Gross Domestic Product growth rate stood at 2.1% compared to 1.8% in the previous quarter. Both the quarterly and the yearly print missed expectations, prompting some intraday selling around the Australian Dollar during the Asian session.
- Speaking before a parliamentary committee earlier today, Reserve Bank of Australia Governor Michele Bullock said that the central bank is looking very hard at recent inflation numbers to see if some of the price pressures are temporary. Bullock added that if inflation proves to be persistent, it would have implications for future monetary policy. This dampens hopes for more policy easing and lends support to the Aussie.
- In fact, Australia’s headline Consumer Price Index (CPI) accelerated from a 3.5% increase reported in the previous month to 3.8% YoY in October. Moreover, the RBA Trimmed Mean CPI rose 3.3% during the reported month from 3.2% in September. This indicated that inflation remains above the RBA’s 2% to 3% annual target and raises questions about just how much headroom the central bank has to cut rates further.
- The latest data published by RatingDog showed that China’s Services Purchasing Managers’ Index (PMI) dropped to 52.1 in November from 52.6 in October. This, however, was better than consensus estimates for a reading of 52 and does little to dent the underlying bullish sentiment surrounding the China-proxy AUD.
- The US Dollar hangs near its lowest level since November 14, touched on Monday, amid dovish Federal Reserve expectations, and contributes to limiting the downside for the AUD/USD pair. According to the CME Group’s FedWatch Tool, traders are pricing in a nearly 90% chance of a 25-basis-point rate cut on December 10. Moreover, speculations of a dovish pick for the next Fed Chair undermine the Greenback.
- Meanwhile, the prospects for lower US interest rates, along with hopes for a peace deal between Russia and Ukraine, remain supportive of a generally positive tone around the equity markets. This further dents the safe-haven buck and benefits the risk-sensitive Aussie. Traders now look to the release of the US ADP report on private-sector employment and the US ISM Services PMI for a fresh impetus.
- The market attention, however, will remain glued to the US Personal Consumption Expenditure (PCE) Price Index, due on Friday, which will be scrutinized for cues about the Fed’s future rate-cut path. This, in turn, will play a key role in influencing the USD and determining the next leg of a directional move for the AUD/USD pair. The fundamental backdrop, meanwhile, remains tilted in favor of bullish traders.
AUD/USD constructive technical setup backs the case for a move beyond the 0.6600 mark
The recent breakout through a descending trend-line hurdle extending from the September swing high and acceptance above the 100-day Simple Moving Average (SMA) favors the AUD/USD bulls. Moreover, oscillators on the daily chart have been gaining positive traction and are still away from being in the overbought territory. This, in turn, validates the near-term positive outlook, suggesting that any corrective pullback could be seen as a buying opportunity near the aforementioned confluence resistance breakpoint, currently around the 0.6535-0.6530 region.
This is closely followed by the 0.6500 psychological mark. A convincing break below the latter could make the AUD/USD pair vulnerable to weaken further below the 200-day SMA, currently pegged near the 0.6465 zone, toward challenging a multi-month low, around the 0.6420 region, touched in November. Some follow-through selling, leading to a subsequent fall below the 0.6400 mark, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
Nevertheless, the AUD/USD pair seems poised to prolong a two-week-old uptrend and aim to reclaim the 0.6600 mark, above which the momentum could extend further towards the next relevant hurdle near the 0.6660-0.6665 region. Spot prices could eventually climb to test the year-to-date high, levels just above the 0.6700 mark, touched in September.
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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