Australian Dollar rises sharply on RBA’s hawkishness, USD weakness
- AUD/USD surges higher amidst positive Australian economic data.
- Monetary policy divergence continues to favor the Aussie.
- Focus shifts to US PCE data, which may influence market expectations for Fed rate cuts in November.
The AUD/USD pair surged higher on Thursday, rising by 0.90% to 0.6890. The Australian Dollar strengthened after the release of positive economic data and the hawkish stance of the Reserve Bank of Australia (RBA) this week. Meanwhile, the US Dollar weakened as markets are hopping for a larger cut by the Federal Reserve (Fed) in November.
Amidst a multifaceted economic landscape in Australia, the Reserve Bank of Australia's (RBA) assertive stance on inflation has led markets to anticipate a modest reduction in interest rates by only 0.25% in 2024.
Daily digest market movers: Australian Dollar rises sharply on RBA's rate hold
- The Aussie advanced significantly against the US Dollar after the RBA kept its interest rates unchanged at 4.35%, but maintained a hawkish message.
- In fact, RBA Governor Michelle Bullock stated that the bank isn’t considering rate cuts.
- Market participants anticipate that the Fed may implement another 50 basis point (bps) interest rate cut in November, following its initial 50 bps reduction to 4.75%-5.00% last week.
- Investors are closely watching the upcoming release of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for August.
- The core PCE inflation data, which is the Fed's preferred inflation gauge, is expected to increase from 2.6% in July to 2.7%.
- A sustained increase in inflation could reinforce expectations for the Fed to reduce interest rates by 50 bps in November, while a stronger-than-expected reading may dampen those expectations.
AUD/USD technical outlook: Aussie regains momentum after Wednesday’s decline
After a decline to around 0.6800, the AUD/USD pair gained momentum, rising to near 0.6900. Indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators suggest a steady bullish momentum and the pair may be set to retest the area above 0.6900.
If the Aussie resumens its downside it might retest the 0.6800 area which proved to be a strong support. Below, 0.6750 and 0.6730 line up.
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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