Australian Dollar rises on USD weakness, local inflation data
- AUD/USD rebounds from multi-week lows amid USD weakness.
- A break above the 200-day SMA at 0.6630 could signal a more positive outlook for the pair.
- The RBA's cautious tone and persistent inflation risks suggest that interest rates may stay steady for the foreseeable future.
- The upcoming US NFP report could weigh on the US Dollar and provide support for AUD/USD.
The AUD/USD rebounded from multi-week lows on Wednesday, driven by broad-based US Dollar weakness. The pair rose by 0.25% to 0.6575, snapping a three-day losing streak.
On the US data front, September’s ADP Employment Report exceeded market expectations in October, but a downward revision in third-quarter GDP growth made the USD tumble. On the other hand, Australia’s Q3 inflation figures cooled but still remain elevated.
Daily digest market movers: Australian Dollar rises on US economic data weakness, USD consolidation
- AUD/USD rose on Wednesday, boosted by mixed US economic data, which limited the USD gains.
- The pair climbed to 0.6600, targeting the 200-day SMA at 0.6627, a break above which would signal a shift to a more constructive outlook.
- Recent data from Australia showed inflation cooling to 2.8% in Q3 from 3.8% in Q2, falling just below the expected 2.9%.
- The core inflation gauge remains elevated at 3.5% YoY in Q3, giving the RBA no immediate impetus to lower interest rates.
- US ADP Employment showed a 233K increase on private-sector payrolls in October, beating expectations of a 115K increase.
- US Q3 Gross Domestic Product grew at a 2.8% pace, stronger than global peers but below market expectations.
- For next week’s Federal Open Market Committee (FOMC) meetings, markets have already priced in a 25 bps cut.
AUD/USD technical outlook: Pair in consolidation mode, but the outlook is bearish
The daily Relative Strength Index (RSI) is currently at 34, which is in the near oversold area. The RSI is suggesting that buying pressure is recovering since it is rising sharply as selling might have become over-extended. The Moving Average Convergence Divergence (MACD) is red and flat, which gives more evidence of a consolidation starting.
Technical analysis indicates a bearish outlook for AUD/USD, with the RSI below 30 and the MACD histogram in the red. Support levels are located at 0.6550, 0.6530 and 0.6500, while resistance lies at 0.6680, 0.6700 and 0.6750. However, oversold conditions may provide respite, while the pair is closely watched ahead of key US data releases that could impact the trajectory of both currencies.
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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