Australian Dollar steady amid modest USD pullback
- AUD/USD defends its ground due to a modest pullback in the US Dollar.
- Corrective decline in US Treasury bond yields and profit-taking around the safe-haven US Dollar benefit the risk-sensitive Australian Dollar.
- Monetary policy divergences between the Fed and RBA might also benefit the Aussie.
The AUD/USD traded around 0.6625 during Thursday's session. A modest pullback in the US Dollar and a stable performance in equity markets contributed to the Aussie losing further ground.
Corrective declines in US Treasury bond yields and profit-taking around the safe-haven US Dollar might affect the risk-sensitive Australian Dollar. In addition, while the Federal Reserve (Fed) is expected to cut interest rates two more times in 2024, the Reserve Bank of Australia’s (RBA) hawkish stance might also limit the AUD/USD decline.
Daily digest market movers: Australian Dollar gains on USD pullback
- The USD Index (DXY) retreats due to a decline in US Treasury bond yields and a stable equity market, benefiting the risk-sensitive AUD.
- The US flash PMI prints for October show higher Composite and Manufacturing activity, while Services activity remains strong but fails to benefit the USD.
- The RBA isn’t showing clear signs of embracing rate cuts as it maintains the Official Cash Rate (OCR) at 4.35%, while the Federal Reserve is expected to cut in November and December.
AUD/USD technical outlook
The Relative Strength Index (RSI), which measures the momentum of price changes, is at 34, suggesting that selling pressure is flat. The Moving Average Convergence Divergence (MACD), which is used to identify trend changes and trading signals, is below the zero line. The red histogram suggests that selling pressure is rising. The overall outlook is bearish, and it would be reinforced if the sellers breach the 200-day SMA at 0.6630.
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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