- AUD/USD remains at its highest level since January near 0.6800.
- Higher PPI data did not stop the pair from continuing its upward trend.
- Monetary policy divergence between the RBA and the Fed is troubling the pair.
The Australian Dollar (AUD) maintained its positive trajectory against the USD in Friday’s session, rising 0.30% to 0.6780. The AUD resumed its gains with market participants adjusting their bets on the Federal Reserve (Fed) following the release of US inflation figures. The hot US Producer Price Index (PPI) figures failed to trigger a recovery in the Dollar.
The Reserve Bank of Australia (RBA) is set to be one of the last central banks among G10 nations to initiate rate cuts, a factor that could extend AUD gains.
Daily Market Wrap: AUD could extend gains as RBA delays tapering and markets look to dovish Fed
- On the economic data front, the US Producer Price Index (PPI) for final demand rose 2.6% year-on-year in June, according to data released by the US Bureau of Labor Statistics on Friday.
- This was higher than the 2.3% forecast, beating the previous increase of 2.2% in May. The core PPI also exceeded market expectations at 3%.
- However, sentiment data from the University of Michigan came in below expectations at 66.0, compared with 68.5 expected and 68.2 prior.
- The CME’s Fedwatch tool predicts a greater than 80% probability of a 25 basis point cut in September.
- On the other hand, speculation is growing that the RBA could delay the global rate-cutting cycle or even raise interest rates again as a result of high inflation in Australia. This view forces the RBA to maintain its hawkish stance.
- In addition, China, one of Australia’s closest trading partners, has announced its trade balance data for June, showing a trade surplus of $99.05 billion, a significant increase from the previous figure of $82.62 billion.
Technical Analysis: AUD/USD Holds Highs, Signals Impending Correction
The AUD/USD remains bullish, holding on to the heights reached in January. However, the RSI and MACD indicate that they are close to overbought territory, suggesting a possible correction is imminent.
Buyers are looking to hold the 0.6760-0.6780 range and break above the 0.6800 area if possible. Conversely, the 0.6670, 0.6650 and 0.6630 levels are set as support ranges in case of a correction.
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 data, 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.
