- AUD/USD retreats on resurgent safe-haven demand for the US Dollar amid persistent global economic concerns.
- The RBA’s hawkish stance and market expectations of a 50 basis point rate cut by the Fed in November support the pair.
- Despite lower Australian CPI data, RBA rate cuts in the near term remain unlikely.
The AUD/USD retreated on Wednesday, falling 0.70% to 0.6850. The pair’s decline came as the US Dollar regained its safe-haven appeal amid persistent global economic concerns. Despite lower Australian Consumer Price Index (CPI) data, near-term RBA rate cuts remain unlikely, limiting the downside potential for AUD/USD. Federal Reserve (Fed) Chair Jerome Powell’s upcoming speech on Thursday and the US Personal Consumption Expenditure (PCE) Price Index on Friday will be closely watched for further clues on the central banks’ monetary policy stance.
The outlook for the Australian economy is uncertain due to contrasting indicators and the Reserve Bank of Australia’s (RBA) hawkish stance on inflation. As a result, markets are anticipating a modest rate cut of just 0.25% in 2024, signalling a shift from previous expectations of further easing.
Daily Market Wrap: Australian Dollar Falls as Markets Digest Weak CPI and USD Strength
- Despite positive news about China’s new stimulus measures, concerns about the global economic downturn and geopolitical risks are making investors cautious, leading to a weaker opening in European equity markets.
- The safe-haven US dollar is rebounding from its lowest point this year, benefiting from risk aversion and diverting flows away from the risk-sensitive Australian dollar.
- The market is predicting a 50 basis point rate cut by the Fed in November, in contrast to the Reserve Bank of Australia’s hawkish stance, supporting AUD/USD.
- RBA Governor Michele Bullock indicates that recent data has not significantly affected the policy outlook, reinforcing the hawkish stance and limiting the downside in AUD/USD.
- Australian CPI data showed headline inflation fell to 2.7% year-on-year, its lowest level since early 2022, offering some relief but insufficient to justify RBA rate cuts.
AUD/USD Technical Outlook: AUD/USD takes a pause, no sell signal
The AUD/USD saw sharp upward moves that pushed the pair to multi-month highs near 0.6900 in the recent sessions. That improved the outlook which remains bullish.
The Relative Strength Index (RSI) and the Moving Average Convergence/Divergence Indicator (MACD) took a big hit on Wednesday, but they should not be considered a sell signal. Buyers seem to be taking a pause after reaching highs since December. A correction was needed.
The Australian Dollar
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Since Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Trade Balance. Market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or seeking safe havens (risk-off), is also a factor, with risk-on being positive for the 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 RBA’s main objective 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 ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy is not growing as fast as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, worth $118 billion per year as of 2021, with China being its main destination. The price of iron ore can therefore be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD rises as well, as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to lead to a higher probability of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and 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, its currency will gain value solely because of the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on buying imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
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.
