Australian Dollar hits three-month high after China stimulus, RBA decision
- Australian Dollar reaches a three-month high of 0.6852 against the US Dollar on Tuesday.
- AUD/USD is supported by China's stimulus measures, a weaker USD, and positive global market sentiment.
- RBA held rates steady and maintained its hawkish stance, further supporting the AUD.
The AUD/USD pair rallied to near 0.6870 in Tuesday's North American session, producing a three-month high. The Aussie asset gained ground after China's massive stimulus boost to revive household spending, real estate demand, and economic growth. The Reserve Bank of Australia (RBA) held rates steady and maintained a hawkish posture, also adding to the Aussie’s gains.
The Australian economic outlook is uncertain, but the RBA has taken a hawkish stance due to high inflation. As a result, markets are now expecting only a 0.25% interest rate cut in 2024. This is a significant change from previous expectations, which included a series of rate cuts. The RBA's decision to adopt a hawkish stance has dampened market sentiment and led to a decrease in inflation expectations.
Daily digest market movers: Aussie on the rise after RBA hold, CPI data in focus
- RBA holds rates steady at 4.35%, signaling no near-term rate cuts despite recent data.
- Michele Bullock, chair from the RBA then delivered a press conference, repeating her well-known hawkish message and affirming rates will remain on hold for the time being.
- Bullock added that the Board does not see rate cuts in the near term, as recent data has not “materially affected” the policy outlook.
- In addition, the PBoC announced measures to support the Chinese economy, including a 50 bps RRR cut and a 0.2% reduction in the 7-day repo rate. Any support or aid given to the Chinese economy tends to benefit the Aussie.
- AUD/USD also gains further ground after tepid US data fuels speculation of a 50 bps Fed rate cut in November.
- Australia's August Monthly Consumer Price Index is expected to rise by 2.8%, down from 3.5% in July.
AUD/USD technical outlook: Bullish momentum mounts with pair nearing July 2023 highs
AUD/USD's upward movement shows potential. Daily indicators indicate a positive trend, but the AUD/USD is not yet in overbought territory, so the pair has some more room to continue the trend.
Bulls will face strong resistance at the 0.6900-0.6930 range. In case of being rejected the pair could fall to the 0.6800-0.6850 zone to consolidate the recent gains.
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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