Australian Dollar clears losses as market digests Powell’s words and RBA minutes
- AUD/USD continues sideways trading around 20-day SMA.
- Fed Minutes on Wednesday follow RBA’s turn.
- May’s Retail Sales from Australia and US ADP figures are also due on Wednesday.
- Powell showed confidence in inflation coming back down to 2% sooner than expected.
Tuesday's session witnessed the Australian Dollar (AUD) clearing losses against the US Dollar following the release of the hawkish Reserve Bank of Australia (RBA) minutes and the US JOLTs figures from May. For the USD, the confidence of Jerome Powell on inflation coming back down sooner on the prospects of a cooling labor market weakened the Greenback.
The Australian economy exhibits some signs of weakness. Nevertheless, the persistently high inflation is prompting the RBA to delay potential rate cuts. The RBA is set to be among the last G10 countries' central banks to start reducing rates, which may limit the downside of the Aussie.
Daily digest market movers: Aussie clears losses as market assesses latest RBA minutes
- RBA Minutes from June meeting offered more details on bank’s hold stance. One of the main reasons that the RBA members saw a stronger case to leave the policy rate unchanged rather than a hike was because of the “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress.”
- On Wednesday, sales figures for May in Australia will be reported. The expectation is for a 0.3% MoM rise compared with 0.1% in April and its outcome will be key.
- Markets predict a 25% chance of a 25-basis-point rate increase at the next August 6 meeting from the RBA.
- In the US, JOLT Job Openings came in above 8 million in May.
- In addition, Jerome Powell was on the wires and admitted some progress on inflation and that the rate may reach 2% the next year.
- As for now, the market sees 70% odds of a Federal Reserve rate cut in September but will heavily depend on the upcoming data.
Technical analysis: AUD/USD sways above the 20-day SMA
From a technical perspective, the AUD/USD has continued a trend of sideways trading since mid-May. The 20-day Simple Moving Average (SMA) at 0.6640 provides strong support, with further support found at levels 0.6620 and 0.6600. The critical resistance levels are currently set at 0.6660, 0.6690 and 0.6700. This supports a continuation of the established 0.6600-0.6700 range.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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