Australian Dollar weakens after RBNZ decision, Chinese concerns
- AUD/USD shows a decrease, dropping to 0.6615.
- RBA maintains its hawkish position, potentially balancing the downside.
- RBNZ’s dovish posture dragged down the Aussie as well as the Kiwi on Wednesday.
The AUD/USD pair experienced a decrease of 0.30% during Wednesday's session, settling near 0.6615, after the dovish Reserve Bank of New Zealand (RBNZ) decision. In addition, potential decline in demand for Australian exports due to the slowdown in the Chinese may negatively impact the AUD. However, the hawkish stance of the Reserve Bank of Australia (RBA), paired with mixed Australian economic data, can potentially temper the downside.
Despite the mixed Australian economic outlook and high inflation, the RBA's consistent hawkish position only strengthens predictions for 25 bps of easing for 2024.
Daily digest market movers: Aussie under some pressure due to commodities and China's waning demand
- The pair's descent on Wednesday came despite further US Dollar losses, as a result of falling copper and iron ore futures. Worsening credit data from China, coupled with the country's weakened demand and substantial commodity supply, has negatively impacted markets.
- In addition, the RBNZ unexpectedly cut interest rates by 25 basis points this morning and also revealed that a 50-basis-point cut had been seriously considered, which dragged down both the Kiwi and the Aussie.
- However, investor confidence in the Australian Dollar was recently bolstered by the RBA's decision to maintain the official cash rate (OCR) at 4.35%. Its cautious view, along with predictions of sustained domestic inflation, suggests that both trimmed-mean and headline CPI inflation are now expected to meet the mid-point of the 2-3% range by late 2026, later than the earlier prediction of June 2026.
- In that sense, among the G10 central banks, RBA is anticipated to be the last to initiate interest rate cuts. In contrast, the Federal Reserve (Fed) is expected to facilitate easing in the near future, and this contrast may support AUD/USD in the coming months.
AUD/USD technical outlook: AUD/USD buyers breathe, outlook still promising
The AUD/USD pair currently displays a moderate bullish sentiment, with the Relative Strength Index (RSI) remaining fairly neutral around the 50 region, while the Moving Average Convergence Divergence (MACD) is showing green bars.
Key support lies at 0.6600 and 0.6580, while resistance is observed around the 0.6640 area. Testing of these key levels is crucial for determining the pair's future direction.
Central banks FAQs
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%.
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.
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%.
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.