Australian Dollar strong ahead of RBA decision
- Australian Dollar strengthens against its US counterpart due to RBA policy outlook.
- RBA is expected to maintain its Official Cash Rate unchanged at 4.35%.
- US S&P Global PMIs data came in mixed during the European session
On Monday the AUD/USD was seen rising by 0.40% to 0.6835 by late in the US session. The Reserve Bank of Australia's (RBA) hawkish policy outlook and the release of preliminary S&P Global PMI data for September from the US were the primary movers of the pair.
With uncertainty surrounding Australia's economic future and the RBA maintaining a cautious stance in response to persistent inflation, financial markets anticipate a modest 25 bps interest rate cut in 2024.
Daily digest market movers: Australian Dollar rises on RBA policy outlook, US Dollar recovers
- Australian Dollar edges higher ahead of RBA policy meeting, as investors anticipate an unchanged Official Cash Rate of 4.35%.
- RBA's forward guidance on interest rates beyond the current year will be closely scrutinized amid persistent inflationary pressure and a solid labor market.
- On the other hand, the US Dollar regained some ground, buoyed by skepticism regarding the Federal Reserve's aggressive rate-cutting path.
- CME FedWatch data indicates a total of 75 bps in rate cuts over November and December, with a 50% probability of a 50 bps reduction in November.
- Over 100 economists polled by Reuters forecast 25 bps rate cuts at both of the Fed's remaining meetings.
- On the data front, the composite S&P PMI expanded at a slower pace of 54.4 in September, down from 54.6 in August.
- Manufacturing PMI unexpectedly declined to 47.0, while the services PMI expanded at a better-than-projected 55.4.
AUD/USD technical outlook: Bulls surge and have more room to go
With the pair above 0.6800 and indicators showing strength, the AUD/USD might have more room to go higher. The Relative Strength Index (RSI) is at 64, which means that it isn’t yet in the overbought zone, while the Moving Average Convergence Divergence (MACD) indicator is printing rising green bars. The next target lies around 0.6850.
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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