Australian Dollar retreats as US Dollar gains momentum after S&P PMI data
- Aussie dropped 0.27% to 0.6495 in Friday's trading.
- Mixed Judo Bank PMI data impacted the AUD, with strong manufacturing but weak service sector activity.
- S&P PMI data from the US came in strong.
The AUD/USD declined just below 0.6500 as the market is focused on the US Dollar's strength. The US Dollar Index (DXY) index hit a two-year high above 108.00.
The AUD/USD pair exhibits a mixed outlook, influenced by the interplay of hawkish Reserve Bank of Australia (RBA) and mixed local economic data. However, the potential for future RBA rate hikes may limit the downside, though the overall trend remains bearish.
Daily digest market movers: Australian Dollar pares gains against US Ddollar as solid S&P PMI data lifts the Greenback
- The preliminary reading of Australia's Judo Bank Manufacturing PMI rose by 2.1% to 49.4 in November. The Services PMI declined by 1.4% to 49.6, while the Composite PMI fell by 0.8% to 49.4.
- In the United States, the Composite PMI rose by 1.2% to 55.3 in November. The Manufacturing PMI improved by 0.3% to 48.8, while the Services PMI rose by 2% to 57 in November.
- Business confidence in the US hit a two-and-a-half-year high in November, according to S&P Global.
- This week, the USD pared back losses as traders reduced bets of a December rate cut by the Fed after hawkish comments from Fed Chairman Jerome Powell.
- On the Aussie’s side, the RBA might bail the pair out as the bank is allegedly considering rate hikes.
AUD/USD technical outlook: Outlook remains bearish as indicators stay negative, and the pair struggles to recover
The AUD/USD pair struggles to recover, capped by negative technical indicators and the 20-day Simple Moving Average (SMA). The Relative Strength Index (RSI) remains deeply embedded in the bearish territory below 30, indicating persistent selling pressure. Similarly, the Moving Average Convergence Divergence (MACD) indicator prints red bars. These bearish signals suggest that the pair may continue to face difficulties sustaining any significant recovery in the near term.
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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