Australian Dollar declines after local inflation data
- AUD/USD retreats on resurgent demand for safe-haven US Dollar amid lingering global economic concerns.
- Hawkish RBA stance and market expectations of 50 bps Fed rate cut in November support the pair.
- Despite softer Australian CPI data, near-term RBA rate cuts remain unlikely.
The AUD/USD retreated on Wednesday, declining by 0.70% to 0.6850. The pair's decline came as the US Dollar regained its safe-haven appeal amidst persistent global economic concerns. Despite the weaker Australian Consumer Price Index (CPI) data, near-term RBA rate cuts remain unlikely, limiting the AUD/USD's downside potential. The upcoming speech from Federal Reserve (Fed) Chair Jerome Powell on Thursday and the US PCE Price Index on Friday will be closely watched for further cues on the central banks' monetary policy stance.
The Australian economy's outlook is uncertain due to contrasting indicators and the Reserve Bank of Australia's (RBA) aggressive stance on inflation. As a result, markets are anticipating a modest interest rate cut of only 0.25% in 2024, signaling a shift away from previous expectations of more significant easing.
Daily digest market movers: Australian Dollar declines as markets digest soft CPI, USD strength
- Despite positive news about China's new stimulus measures, global economic downturn concerns and geopolitical risks make investors cautious, leading to a weaker open in European equity markets.
- The safe-haven US Dollar rebounds from its lowest point this year, benefiting from risk aversion and driving flows away from the risk-sensitive Australian Dollar.
- The market predicts a 50-basis-point rate cut by the Fed in November, contrasting with the Reserve Bank of Australia's hawkish stance, supporting AUD/USD.
- RBA Governor Michele Bullock indicates that recent data has not significantly affected the policy outlook, reinforcing the hawkish stance and limiting AUD/USD downside.
- Australian CPI data showed a decline to 2.7% YoY in headline inflation to its lowest level since early 2022, offering some relief but insufficient to warrant RBA rate cuts.
AUD/USD technical outlook: AUD/USD take a breather, no sell signal
The AUD/USD saw sharp upward movements which propelled the pair to multi-month highs near 0.6900 in the last sessions. That improved the outlook which remains bullish.
The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) took a big hit on Wednesday, but they shouldn't be considered a sell signal. The buyers seem to be taking a breather after reaching highs since December. A correction was necessary.
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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