Australian Dollar gathers strength after RBA Minutes
- The Australian Dollar recovers some lost ground in Tuesday’s Asian session.
- The hawkish remarks of the RBA lift the Aussie, but the fear of geopolitical risks might cap its upside.
- Investors will keep an eye on the Fedspeak later on Tuesday.
The Australian Dollar (AUD) trades on a stronger note on Tuesday, snapping the three-day losing streak. The hawkish tone of the Reserve Bank of Australia (RBA) after the September Meeting Minutes provides some support to the Aussie. However, the risk-off sentiment amid the escalating geopolitical tensions in the Middle East might exert some selling pressure on riskier assets like the AUD for the time being.
Looking ahead, investors await the Fedspeak later on Tuesday for fresh impetus ahead of the Federal Open Market Committee (FOMC) Minutes. The attention will shift to the US Consumer Price Index (CPI) for September, which will be released on Thursday.
Daily Digest Market Movers: Australian Dollar gains ground after the RBA Minutes
- According to the RBA September Meeting Minutes released on Tuesday, the board members discussed scenarios for lowering and raising interest rates in the future.
- "Policy will need to remain restrictive until Board members are confident inflation is moving sustainably towards the target range,” noted the RBA Minutes.
- St. Louis Fed President Alberto Musalem noted on Monday that he supports additional interest rate cuts as the economy moves forward. Musalem further stated that the performance will determine the path of monetary policy, per Reuters.
- Minneapolis Fed President Neel Kashkari said on Monday that he supported the Fed's decision to cut rates by 50 bps, adding that the balance of risks shifted from "high inflation towards maybe higher unemployment.
- According to the CME FedWatch Tool, the markets have priced in nearly an 85% chance of 25 bps Fed rate cuts in November, up from 31.1% last week.
Technical Analysis: Australian Dollar keeps the bullish vibe in the longer term
The Australian Dollar pair rebounds on the day. According to the daily chart, the AUD/USD pair remains stuck within the lower limit of the ascending trend channel. The pair maintains the bullish bias as it is well-supported above the key 100-day Exponential Moving Average (EMA). Nonetheless, further consolidation or downside cannot be ruled out as the 14-day Relative Strength Index (RSI) is located below the midline near 47.0.
The lower limit of the trend channel near 0.6735 acts as an initial support level for AUD/USD. A breach of the mentioned level could create a bearish momentum that drags the pair down to the 0.6700 psychological level. The additional downside filter to watch is 0.6622, the low of September 11.
On the upside, the first upside barrier emerges at 0.6823, the high of August 29. Extended gains could pave the way to 0.6942, the high of September 30. A decisive break above this level could draw in enough buyers to push AUD/USD to the upper boundary of the trend channel at 0.6980.
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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