Australian Dollar declines amid recession fears
- Australian Dollar declines amid recession fears
- Consumer and business sentiment in Australia continues to deteriorate, dragging down the Australian Dollar amid recession fears
- RBA maintains its hawkish stance with rate cuts unlikely in the near term despite global easing trends
- China's trade data shows mixed results with strong exports but weak imports, indicating ongoing economic challenges
The AUD/USD declined by 0.10% to 0.6660 in Tuesday's session, impacted by weak Australian data and a steady US Dollar.
Amidst uncertainty in the Australian economy and concerns over persistent inflation, financial markets anticipate a modest interest rate cut of only 0.25% in 2024. This is in line with the Reserve Bank of Australia's (RBA) firm stance on inflation, which has led to a relatively hawkish outlook for monetary policy.
Daily digest market movers: Australian Dollar declines as data raises recession fears
- Australian Dollar falls against US Dollar following weak consumer and business confidence data
- Westpac Consumer Sentiment Index dipped 0.5% in August, aligning with elevated concerns about the economic and employment outlook
- Business confidence and conditions deteriorated in August as per NAB's Business Confidence Index, reaching their lowest levels since November and January 2022, respectively
- Despite the Reserve Bank of Australia's firm stance against rate cuts due to inflationary concerns, analysts predict a shift toward an easing cycle with a rate cut anticipated by December
- On the data front, China's August exports surpassed expectations by growing 8.7% YoY, largely influenced by favorable base effects
- Import growth, however, was weaker than anticipated at 0.5%, indicating limited progress in boosting domestic demand
- All economic news in China is closely followed by Aussie traders as it is a close trading partner from Australia
AUD/USD technical outlook: Bearish momentum continues with bulls nowhere to be found
In the last several sessions, the AUD/USD pair has created lower highs and lower lows, suggesting that the overall outlook is bearish. Tuesday's decline of around 0.1% continues this trend and reinforces the bearish outlook. The Relative Strength Index (RSI) is currently at 42, which is in the negative area and suggests that selling pressure is rising.
The Moving Average Convergence Divergence (MACD) is also bearish with the histogram turning red and rising.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for 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 main goal of the RBA 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. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus 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, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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