Australian Dollar extends losses as traders digest US Retail Sales data
- AUD/USD shows a further decrease in Tuesday falling below 0.6730.
- Australian labor data will dictate short-term dynamics which might prompt a more hawkish RBA.
- Strong US data might not be enough to close the divergence between the Fed and RBA policies.
The Australian Dollar (AUD) continued to lose ground against the USD on Tuesday, falling to 0.6730. After an initial decline in Monday's session, the AUD has extended its losses as profit booking by investors heightens. However, the fundamental outlook hints at the AUD's potential resilience against the USD amidst monetary policy divergences between the Federal Reserve and the Reserve Bank of Australia (RBA).
Despite signs of frailty in the Australian economy, stubbornly high inflation has put the brakes on the RBA's intention of lowering interest rates. It is anticipated that the RBA will be one of the last central banks among the G10 countries to begin cutting rates, a factor that might limit the AUD's downside and extend its gains.
Daily digest market movers: AUD may see an upside as the labor market could justify a hike
- Investors are keeping a close eye on the Australian Employment data due for release on Thursday. The report is forecasted to show that in June, 20,000 job-seekers found employment, compared to 39,700 in May.
- If the unemployment rate remains steady at 4.0%, it will signify a robust labor market that may further fuel expectations of the RBA's policy-tightening stance.
- Retail Sales went from 0.1% to 0.0%, with the previous 0.1% revised to 0.3%.
- Retail Sales ex Autos rose by 0.4% after the 0.1% decline in May. That same decline has been revised to 0.1%.
- Market pricing currently indicates nearly a 50% chance of the RBA increasing rates in either September or November. Conversely, the odds of a rate cut by the Federal Reserve in September stand at 90%, subject to incoming data.
Technical Analysis: AUD/USD enters consolidation phase, overall outlook remains positive
Despite the recent losses, the AUD/USD's outlook remains positive, with the pair retaining levels not seen since January. Following a rally of over 1.5% in July, indicators including the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) approached overbought territory which prompted a slight correction.
The target for the buyers is to sustain between the 0.6700-0.6730 range while additional support lines are marked at 0.6680 and 0.6650.
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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