- Australian Dollar faced challenges due to risk-off sentiment and softer commodity prices.
- Australian PMI data indicated a contraction in business activities.
- US ADP Employment Change added 164K new positions against the 101K prior.
- Initial Jobless Claims reduced to 202K from the previous reading of 220K.
The Australian Dollar (AUD) attempts to snap its losing streak on Friday. The AUD/USD pair is facing downward pressure, even with the US Dollar (USD) lacking a clear direction and an improvement in China’s Caixin Services PMI in December. The weakened market sentiment and a widespread decline in commodity prices are both playing a role in the Aussie Dollar’s weakness.
Australia’s latest Judo Bank Purchasing Managers Index (PMI) data indicated a contraction in business activities across both the services and manufacturing sectors, further highlighting the vulnerability of the Australian Dollar. The Services PMI specifically showed the most rapid contraction in services since the third quarter of 2021. However, Matthew De Pasquale, Economist at Judo Bank, proposes that the deceleration in the Australian economy is not gaining momentum.
The US Dollar Index (DXY) holds a steady course, exhibiting a slight inclination towards positive sentiment and potential gains. Nevertheless, the retracement of recent advances in United States (US) Treasury yields might put some pressure on the Greenback. Furthermore, the optimistic employment data unveiled on Thursday could be bolstering support for the US Dollar.
US ADP Employment Change surged in December, adding 164K new positions, surpassing both the previous figure of 101K and the market expectation of 115K. Initial Jobless Claims for the week ending on December 29 displayed positive signs for the labor market, decreasing to 202K from the previous 220K, beating the anticipated 216K. However, the S&P Global Composite PMI for December reported a minor dip in business activities, registering a reading of 50.9 compared to the market consensus of a steady 51.0.
Traders await more crucial data from the US employment market including Average Hourly Earnings and Nonfarm Payrolls (NFP) data for December. Additionally, the ISM Services PMI is poised to unveil the current conditions within the US service sector.
Daily Digest Market Movers: Australian Dollar faces challenges on softer Aussie PMI
- Australia Judo Bank Services PMI reported a reading of 47.1, falling short of market expectations that it would remain consistent at 47.6. The Composite PMI decreased to 46.9 from the previous figure of 47.4.
- Australia’s Judo Bank Manufacturing PMI indicated a modest contraction in manufacturing activity, declining to 47.6 in December from the previous reading of 47.8.
- RBA’s internal documents revealed a slip in domestic tourism demand. Additionally, consumers are reported to be trading down to more affordable products or reducing their overall purchases due to cost-of-living pressures. However, the documents suggest that private sector wage growth has stabilized at around 4.0%.
- Australian Prime Minister Anthony Albanese announced that he has directed Treasury and Finance to explore measures that can alleviate the financial burden on families in terms of cost of living without exerting additional inflation pressure.
- China Caixin Services PMI rose to 52.9 in December, exceeding the 51.6 expected and 51.5 prior.
- The December minutes from the Federal Open Market Committee (FOMC) suggest that participants think the policy rate has either reached or is close to its highest point in the current tightening cycle. However, they emphasized that the specific trajectory of the policy would hinge on the evolving economic conditions.
- US ISM Manufacturing PMI increased to 47.4 in December from the previous reading of 46.7, surpassing the market consensus of 47.1.
- US JOLTS Job Openings contracted to 8.79 million, falling short of the expected figure of 8.85 million in November.
- US ISM Manufacturing Employment Index improved to 48.1 in December from 45.8 in November.
- US S&P Global Manufacturing PMI posted a lower-than-expected figure of 47.9, diverging from the anticipated consistency at 48.2.
Technical Analysis: Australian Dollar stays above the psychological level at 0.6700
The Australian Dollar trades near 0.6710 on Friday, with a significant resistance level at 0.6750 aligned with the nine-day Exponential Moving Average (EMA) at 0.6751. A successful breakthrough above the latter could pave the way for the AUD/USD pair to challenge the psychological barrier at 0.6800. On the downside, the psychological level at 0.6700 could act as a potential support. A break below the psychological level could push the AUD/USD pair to navigate the major support at 0.6650 followed by the 38.2% Fibonacci retracement level at 0.6637.
AUD/USD: Daily Chart
Australian Dollar price this week
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies this week. Australian Dollar was the strongest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.96% | 0.33% | 0.78% | 1.49% | 2.60% | 1.30% | 1.03% | |
| EUR | -0.81% | -0.47% | -0.03% | 0.68% | 1.65% | 0.49% | 0.16% | |
| GBP | -0.35% | 0.46% | 0.46% | 1.14% | 2.34% | 0.96% | 0.62% | |
| CAD | -0.79% | -0.01% | -0.29% | 0.69% | 1.82% | 0.47% | 0.20% | |
| AUD | -1.50% | -0.70% | -1.14% | -0.73% | 0.96% | -0.20% | -0.51% | |
| JPY | -2.66% | -1.66% | -2.26% | -1.66% | -0.96% | -1.17% | -1.68% | |
| NZD | -1.31% | -0.49% | -0.97% | -0.52% | 0.20% | 1.14% | -0.33% | |
| CHF | -0.98% | -0.18% | -0.64% | -0.17% | 0.53% | 1.62% | 0.31% |
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 Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (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.
Read the full article here