Australian Dollar strengthens as markets digest strong Retail Sales from Australia
- AUD/USD bulls step in as the pair soars to multi-month highs.
- May's strong Retail Sales figures from Australia and weak US ADP data are driving the pair.
- FOMC Minutes reveal members admitting that price pressure is easing.
The Australian Dollar (AUD) soared against the USD to its highest level since January following the report of soft labor market figures from the US and strong Retail Sales data from Australia earlier in the session.
The Australian economy continues to show mixed signs. Nonetheless, persistent high inflation is causing the Reserve Bank of Australia (RBA) to postpone potential rate cuts. As one of the last G10 central banks to initiate rate reductions, this might somewhat extend the gains of the Aussie.
Updated daily market movers: Aussie soars on strong Retail Sales and soft ADPs from US
- Retail Sales figures for May from Australia showed a better-than-expected increase of 0.6% MoM compared to a 0.1% rise in April, boosted by early end-of-financial-year promotions and sales events.
- The market is now factoring in nearly 40% odds of a 25-basis-point rate hike on September 24, rising to roughly 50% for November 5, making these events key to monitoring.
- On Tuesday, Minutes from the June meeting provided a more nuanced perspective on the RBA's hold stance. A major reason for bank members favoring keeping the policy rate unchanged rather than implementing an increase was due to "uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress."
- However, Minutes reflected that the bank left door open for a hike.
- On the US front, private sector employment in the US reported by ADP came in at 150K, lower than the 160K expected, and showed signs of a cooling labor market.
- Regarding Federal Reserve (Fed) expectations, markets are now more confident of a cut in September, betting on nearly 70% odds.
- FOMC Minutes from the June meeting give reasons for the market to hope as they showed that members are acknowledging a cooldown of inflation.
Technical analysis: AUD/USD finds momentum, outlook in favor of the bulls now
After the pair traded sideways since mid-May within the range of 0.6600-0.6700, the AUD/USD has soared above 0.6700 for the first time since January. Indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) leaped further in positive terrain.
On the downside, the 20-day Simple Moving Average (SMA) at 0.6640 provides firm support, with further backstop at levels 0.6620 and the psychological threshold of 0.6600. Resistance stands at 0.6730 and 0.6750.
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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