Australian dollar declines, markets await key data to judge RBA's next steps

AUD/USD

Jul 22, 2024 6:52 PM

AUD/USD registered sharp declines on Monday towards 0.6640.
During the Asian session, the PBOC loan prime rate was cut by 10 basis points.
Aussie’s stability is supported by the hawkish RBA stance, which remains reluctant to embrace cuts.

In Monday's session, the Australian Dollar (AUD) presented additional losses against the USD, with AUD/USD beginning the new week around 0.6640. This loss is largely attributed to falling Copper prices and the People Bank’s of China rate cut of 10 basis points. Revised Gross Domestic Product (GDP) Q2 figures and Personal Consumption Expenditures (PCE) from the US, along with Judo PMIs from Australia, are anticipated to shape the week's trading direction.

Despite some signs of weakness in the Australian economy, stubbornly high inflation continues to prompt the Reserve Bank of Australia (RBA) to delay rate cuts, potentially limiting any further decline in the AUD. The RBA maintains its stance amongst the last central banks within the G10 countries likely to begin rate cuts, a commitment that could extend the AUD's recent gains.

Daily digest market movers: Aussie down on PBoC rate cut and falling copper prices, markets await new data to get fresh clues on the RBA’s stance

The People's Bank of China (PBoC) announced new interest rates. The 5-year interest rate was set at 3.85%, which fell short of the expected 3.95%. Similarly, the 1-year interest rate was adjusted to 3.35%, below the anticipated 3.45%.
In addition, Copper prices fell by nearly 1% on Monday which weighed on the Australian currency as Australia is a big export.
The Australian Bureau of Statistics (ABS) confirmed last week strong employment figures but that the Unemployment Rate ticked higher to 4.1%, up from 4.0%.
The reaction of the Reserve Bank of Australia (RBA) to this data will be closely watched, but as for now, the bank isn’t giving signs of easing on its hawkish stance.
Meanwhile, the market currently predicts a 50% likelihood of the RBA implementing a rate hike either in September or November, reflecting the bank's hawkish stance.
For the Federal Reserve, the chances of a rate cut in September stand at approximately 90%, near to being priced in.
However incoming data from both countries will continue shaping those expectations.

AUD/USD Technical analysis: AUD/USD plunges and remains below the 20-day SMA

While the AUD/USD pair has entered a correction period after early July's sharp gains, the main concern lies with the loss of the core support around 0.6000-0.6040. As technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) hint at weakening momentum, a deeper downside might be looming unless the pair retains the mentioned range.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

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.

How does inflation data impact the value of the Australian Dollar?

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.

How does economic data influence the value of the Australian 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.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

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.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

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.

Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.