Australian Dollar loses traction after short-lived rally against USD

Contents

Australian Dollar news and market movers Australian Dollar technical analysis RBA FAQs

Australian Dollar loses steam in the third day of its recovery rally versus the US Dollar.
Robust US wages keep the inflation flame alive, supporting rate hike probabilities in the US and hence the Buck.
The Australian Dollar is expected to lose a source of support as China slows down and diversifies its raw material sourcing away from Oz.

The Australian Dollar (AUD) stalls in its progress higher against the US Dollar (USD) on Monday as USD recovers on slightly higher probabilities that the Federal Reserve (Fed) will hike interest rates in September.

US labor market data for July was a mixed bag – granted the headline figure showed a slightly lower-than-expected increase in jobs, wages rose more than forecast, possibly prompting a latent upthrust in inflation expectations.

The CME’s FedWatch tool, a trusted market-based gauge of future Fed rate decisions, puts the chances of the Fed raising interest rates in September at 15.5% on Monday, marginally higher than the 13% registered on Friday.

Since higher interest rates are positive for sovereign currencies, because they attract more foreign capital inflows, the slightly higher probability of the Fed hiking in September is positive for USD (the opposite for AUD/USD).

AUD/USD trades little changed in the 0.65s during the US session.

Australian Dollar news and market movers

The Australian Dollar runs out of steam in its brief rally against the US Dollar as the latter retains strength at the start of the week on the basis of slightly higher chances of a rate hike at the next Fed meeting in September.
July wage data from the US Nonfarm Payroll report was higher than forecast, coming out at 0.4% MoM and 4.4% YoY, beating estimates of 0.3% and 4.2% respectively. This may be having a delayed impact on the market response to the data and encouraging more elevated inflation expectations, which may be pushing up interest rate expectations.
The Unemployment Rate in the US also fell to 3.5% from 3.6% when no-change had been forecast – another positive indicator.
US Consumer Price Index (CPI) data on Thursday could further impact interest rate expectations and the USD.
Australia’s largest export Iron Ore has recovered a little. Chinese Iron Ore (62%) Futures are up at $105 per tonne on Friday from $104 on Friday.
China’s expressed policy of trying to diversify away from relying too heavily on Australian raw materials is a long-term negative for the Aussie, according to Clifford Bennet, Chief Economist at ACY Securities.
Cracks are also appearing in China’s trade data suggesting the Chinese economy is experiencing a slowdown in demand, which could have negative repercussions for Australia, adds Bennet.
Chinese Trade Balance data for July, out on Tuesday, could provide fresh information as to how China trade is bearing up.
The Aussie economy will not be ‘saved’ as it has done in the past by Chinese super-growth according to ACY’s Bennet.
Iron Ore, Australia’s chief export to China, is used to make steel for huge infrastructure and building projects, however, given the weaknesses noted in China’s property market demand from this important source may flounder, weakening AUD.
There is still some debate about whether the Federal Reserve has finished putting up interest rates, nevertheless, Fed’s Williams, on Monday, said that the Fed may actually cut rates next year.
Expectations are more certain that the Reserve Bank of Australia (RBA) will not put up interest rates. It has paused twice in a row and the Australian housing market is still reeling from the effects of rate hikes so far. A sizable proportion of homeowners are into negative equity due to the cooling housing market in Australia, according to ACY’s Bennet, suggesting the RBA is unlikely to raise rates higher.
Australian Retail Sales have fallen as inflation and higher mortgage payments hit consumers’ pockets, threatening a slowdown in Australia that will pressure the Aussie lower. The US in contrast is expected to enter a mini-boom on the back of the AI revolution, according to the ACY Economist.
The Australian Dollar has been on a weak footing since the RBA left the policy rate unchanged at 4.1% last week, against the market expectation for a 25 basis point hike. In the policy statement, the RBA explained that the decision to hold rates unchanged would provide them more time to assess the impact of policy tightening to date and the economic outlook.
That said, they did not completely rule out the possibility of more rate hikes in the future, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks,” the RBA noted.

Australian Dollar technical analysis

AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will give the longer-term charts a more bullish tone.

The 0.6458 low established in June is a key level for bears. If this is breached decisively it would color the charts more bearish. Price is currently closer to this key low.

Australian Dollar vs US Dollar: Weekly Chart

Price has now broken cleanly below the confluence of moving averages (MA) close to 0.6700, made up of most of the major SMAs – the 50-week, 50-day and 100-day. The breaching of this key support and resistance level is a bearish sign.

Australian Dollar vs US Dollar: Daily Chart

AUD/USD has also broken below the 0.6600 June lows, and a continuation down to the key May lows at 0.6460, is quite possible. A decisive break below them would open the way for a move down to 0.6170 and the 2022 lows.

The current recovery move from last Thursday’s lows looks more like a correction than a reversal and price could easily recapitulate and start going down again.

Because the pair is in a sideways trend overall it is unpredictable and the probabilities do not favor either bears or bulls overall – nor is the Relative Strength Index (RSI) providing much insight on either timeframe.

In technical terms, a ‘decisive break’ consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.

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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