- AUD/USD is moving lower on Thursday amid a strong rebound in USD demand.
- China’s economic woes and diminishing odds of further RBA rate hikes weigh on the Australian dollar.
- A positive risk tone could help limit further losses ahead of Friday’s key US NFP report.
The AUD/USD pair attracts fresh sellers after an intraday rally towards the 0.6550 area and drops to a fresh daily low during the early part of the European session on Thursday. Spot prices are currently trading around the 0.6515 region and for now, seem to have halted the previous day’s nice bounce from the lowest level since early May.
The US Dollar (USD) makes a strong comeback from the vicinity of a three-week low touched on Wednesday following the FOMC policy decision and turns out to be a key factor exerting downward pressure on the AUD/USD pair. Adding to this, lingering concerns over a slowdown in China, the world’s second-largest economy, undermine the Australian Dollar (AUD), China’s proxy, and contribute to the fall.
A private survey showed business activity in China’s manufacturing sector unexpectedly contracted in July for the first time in nine months, underscoring economic woes. Moreover, mixed consumer inflation figures in Australia on Wednesday dampened hopes for further rate hikes by the Reserve Bank of Australia (RBA), which should weigh on the Australian dollar and support prospects for a further depreciating move for the AUD/USD pair.
Meanwhile, the Federal Reserve (Fed) acknowledged recent progress on inflation and cooling labor market. Moreover, Fed Chairman Jerome Powell, speaking at the post-meeting press conference, noted the likelihood of an early rate cut if inflation remains in line with expectations. This, in turn, drags US Treasury bond yields to a multi-month low, which, together with a positive risk tone, should cap the safe-haven dollar.
This, in turn, could offer some support to the risk-sensitive AUD and help limit the downside of the AUD/USD pair. Traders could also refrain from opening any aggressive directional bets and prefer to wait for the release of the US monthly employment data, popularly known as the Non-Farm Payrolls (NFP) report on Friday. Therefore, any further decline could find good support near the psychological mark of 0.6500.
The RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by a Board of Governors at 11 meetings per year and at ad hoc emergency meetings as necessary. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2%-3%, but also to “…contribute to currency stability, full employment and the economic prosperity and well-being of the Australian people.” Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other tools of the RBA are quantitative easing and monetary tightening.
Although inflation has traditionally always been considered a negative factor for currencies, as it reduces the value of money in general, the opposite has actually occurred in modern times with the relaxation of cross-border capital controls. Moderately high inflation now tends to lead central banks to raise their interest rates, which in turn has the effect of attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in Australia’s case is the Australian dollar.
Macroeconomic data gauges the health of an economy and can impact the value of its currency. Investors prefer to invest their capital in safe, growing economies rather than in weak, shrinking ones. Greater capital inflows boost aggregate demand and the value of the domestic currency. Classic indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the AUD. A strong economy may encourage the Reserve Bank of Australia to raise interest rates, also supporting the AUD.
Quantitative Easing (QE) is a tool used in extreme situations where 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) in order to purchase 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 carried out after QE, when the economic recovery is underway and inflation is starting to rise. While in QE the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets and stops reinvesting the maturing principal of the bonds it already owns. This would be positive (or bullish) for the Australian dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
