Australian Dollar closes the week with losses, RBA hawkish stance limits downside
- AUD/USD registered a significant drop on Friday, slipping below 0.6700.
- Employment data continues to shape possible RBA and Federal Reserve decisions.
- The Aussie’s downside is limited by the hawkish RBA stance which hasn’t shown signs of embracing cuts.
In Friday's session, The Australian Dollar (AUD) saw considerable losses against the USD, falling by 0.30% to 0.6690. This slump in the AUD/USD exchange rate is mostly due to the strengthening of the US Dollar (USD) amid increased aversion to risk. However, higher-than-expected Employment Change figures from Australia, indicating a tight labor market, could curb the AUD's downside by raising concerns over a potential interest rate hike from the Reserve Bank of Australia (RBA) and hence limit the pair’s downside.
Despite some signs of fragility in the Australian economy, persistently high inflation is prompting the RBA to delay rate cuts, potentially limiting any further decline in the AUD. The RBA remains among the last central banks within the G10 countries expected to begin rate cuts, a commitment that could bolster the AUD's position.
Daily digest market movers: Aussie struggles as markets assess employment figures
- On a quiet Friday, markets continue to digest Thursday’s employment figures from Australia which came in mixed.
- It was announced a substantial 50.2K increase in employment changes, soaring beyond earlier market forecasts of 20K and May's 39.5K record.
- On the negative side, the Unemployment Rate rose marginally from 4.0% to 4.1%, which might provide some relief to the RBA's hawkish stance.
- The market currently predicts roughly a 50% chance of the RBA hiking either in September or November.
- Conversely, the chance of the Federal Reserve implementing a rate cut in September stands at approximately 90% according to the CME FedWatch tool.
AUD/USD Technical analysis: AUD/USD falls and concedes the 20-day SMA
After early July's sharp gains, technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) have signaled weakening momentum, suggesting the pair has entered a correction period. On Friday, the pair gave up the crucial support of the 20-day Simple Moving Average (SMA) at 0.6700 which should flash some concerns to trades.
It appears the pair may fluctuate between the 0.6650-0.6780 range in the following sessions as the market adjusts.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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