Australian Dollar momentum loses steam, markets await Judo PMIs

AUD/USD

Jun 20, 2024 5:58 PM

Australian Dollar has lost some momentum in recent sessions despite RBA’s hawkish hold.
Treasury yields benefit US Dollar on Thursday.
Australian economy's next crucial data set will be released in Friday's session with the June Judo PMI figures from Australia.

In Thursday's session, the Australian Dollar (AUD) met with some losses against its peers. This development follows the AUD/USD’s retreat after two consecutive sessions of gains heading toward 0.6670, ultimately succumbing to higher US Treasury yields that boost the USD.

Signs of fragility are emerging in the Australian economy, however, persistently high inflation is causing the Reserve Bank of Australia (RBA) to postpone potential rate cuts, potentially mitigating further losses. The RBA is primed to be among the last G10 nations to initiate rate cuts, a situation that might perpetuate the Aussie's gains.

Daily digest market movers: Australian Dollar consolidates RBA gains, eyes on PMIs

RBA once more demonstrated a hawkish hold, retaining the official cash rate (OCR) at 4.35% without committing to a particular future stance, echoing their phrase “the Board is not ruling anything in or out.”
In her subsequent press conference, Governor Bullock reiterated the Board’s discussions about potential rate hikes and dismissed considerations of rate cuts in the near term.
In light of this, the RBA expressed readiness to do "what is necessary" to guide inflation back within target parameters.
Market anticipates nearly 50 bps of easing by December 2025, while rate hikes in August and September are yet to be ruled out.
Further indications will come from upcoming preliminary data from Australia’s Judo Bank Purchasing Managers Index (PMI) set for release on Friday.
Expected signs of revival in the Australian economy might command the RBA to delay rate cuts, potentially uplifting the Australian Dollar against the USD.
US Treasury yields saw a considerable rise, with gains exceeding 1%. The 2-year, 5-year and 10-year rates stood at 4.74%, 4.29%, and 4.27%, respectively, and seem to be driving demand toward the USD.

Technical analysis: Bullish signals ease off, confirmation still on hold

On the technical front, indicators are losing some intensity despite the recovery of the Relative Strength Index (RSI), which has surged back above 50, while the Moving Average Convergence Divergence (MACD) charts a fresh green bar.

However, it's worth mentioning that these are still buy signals. For a more solid buying confirmation, the AUD/USD pair needs to fully anchor itself above the 20-day Simple Moving Average (SMA). In that sense,sellers might retest the support in the next few sessions to test its strength.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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