- The Australian dollar appreciates for the second consecutive session due to the stability of the US dollar.
- Australian retail sales fell 2.7% month-on-month in December versus the expected 0.9% decline and previous growth of 2.0%.
- The US dollar had to cope with lower US yields due to the consolidation of the US financial balance.
- The US Treasury Department plans to borrow $760 billion in the first quarter, down from a previous estimate of $816 billion in October.
The Australian Dollar (AUD) continues to gain ground on Tuesday amid a stable US Dollar (USD). The AUD/USD pair received upside support as United States (US) bond yields declined in the previous session, a trend attributed to the healing of the US financial balance sheet. Since October 2023, declining yields have contributed to the sustainability of the US Treasury, and stronger economic growth has led to improved tax revenues. The US Treasury Department recently announced borrowing plans worth $760 billion in the first quarter, down from the previous estimate of $816 billion in October.
The Australian Bureau of Statistics released seasonally adjusted retail sales for December on Tuesday, indicating a decline of 2.7% for the month. This figure contrasts with the expected drop of 0.9% and signals a notable reversal of the previous growth of 2.0%. Surprisingly, the Australian Dollar (AUD) strengthened despite the release of disappointing consumer spending data. The AUD's resilience could be attributed to the positive sentiments stemming from news of additional stimulus measures in China, which motivated the AUD/USD pair. On the other hand, the Australian Consumer Price Index (CPI) will be published on Wednesday, which is expected to decline 0.8% in the fourth quarter, compared to 1.2% previously.
The DXY Dollar Index shows stability after experiencing losses on Monday, attributed to improving risk aversion sentiment. This sentiment could intensify as US President Joe Biden's administration is expected to authorize military strikes in response to the recent drone attack on a US outpost in Jordan, which left three US soldiers dead and at least 24 injured.
Investors will closely monitor the statement from the Federal Open Market Committee (FOMC) scheduled for Wednesday, January 31. The consensus expectation is for the federal funds rate to remain unchanged at 5.25%-5.50%. However, the prevailing bias in the markets towards a possible rate cut in March could put downward pressure on the US Dollar (USD). Ahead of the FOMC statement, the House Price Index and Consumer Confidence will be released on Tuesday and will be closely watched for more market insight.
Daily Market Summary: Australian Dollar Consolidates on Stable US Dollar
- Australia's manufacturing PMI rose from 47.6 to 50.3, an improvement. The services PMI also recorded a rebound, going from 47.1 to 47.9. The composite PMI recorded an increase, standing at 48.1 compared to 46.9 in December.
- The Reserve Bank of Australia (RBA) Bulletin has indicated that, over the last six months, companies generally expect a moderation in their price growth, which will remain above the RBA's inflation target range (2.0% -3.0%).
- Chinese financial media reported that the People's Bank of China (PBoC) may cut the Medium-Term Loan Facility (MLF) rate in the current quarter. The announcement follows PBoC Governor Pan Gongsheng's recent statement, who revealed that the central bank would reduce the reserve requirement ratio (RRR) by 50 basis points starting February 5.
- The US core Personal Consumption Expenditure (PCE) Price Index for December showed a monthly increase of 0.2%, in line with expectations and up from 0.1% in the previous reading. Annual core CPI rose 2.9%, below the 3.0% forecast and the previous reading of 3.2%.
- US fourth-quarter annualized Gross Domestic Product rose 3.3% from the previous reading of 4.9%, beating the market consensus of 2.0%.
Technical Analysis: The Australian Dollar surpasses the psychological level of 0.6600
The Australian Dollar is trading around 0.6620 on Tuesday, meeting initial resistance at the 21-day EMA at 0.6629, followed by the key resistance level at 0.6650. A firm advance above this resistance could improve sentiment for the AUD/USD pair to break the 38.2% Fibonacci retracement at 0.6657 behind the psychological barrier at 0.6700. On the downside, the AUD/USD pair could find immediate support at the psychological level of 0.6600. A break below this latest level could lead the pair to revisit the previous week's low at 0.6551, which lines up with the significant 0.6550 level. If that support is broken, the pair could retest the monthly low at 0.6524.
AUD/USD daily chart
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Australian Dollar FAQ
What factors determine the price of 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). As 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 Balance of Trade. Market sentiment, that is, whether investors bet on riskier assets (risk-on) or seek safe havens (risk-off), is also a factor, with the risk-on being positive for the AUD.
How do decisions by the Reserve Bank of Australia affect the Australian dollar?
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 being positive for the AUD.
How does the health of the Chinese economy influence the Australian dollar?
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 does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data usually have a direct impact on the Australian Dollar.
How does the price of iron ore influence the Australian Dollar?
Iron ore is Australia's largest export, with $118 billion a year according to 2021 data, with China being its main destination. The iron ore price, therefore, may be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD also rises as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood of a positive trade balance for Australia, which is also positive for the AUD.
How does the trade balance influence the Australian dollar?
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 from the excess demand created by foreign buyers wanting to purchase its exports versus what it spends on purchasing 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.
