Australian Dollar on the rise amid Greenback weakness
- AUD/USD rises due to a weaker US Dollar following a 50-basis-point rate cut by the Federal Reserve.
- Fed anticipates slower GDP growth and higher unemployment, while inflation is expected to decline.
- RBA hawkish stance also favors the Aussie.
The AUD/USD rose by 0.70% to 0.6815 in Thursday's session. This marks the fourth consecutive session of gains for the AUD/USD, as the Greenback continues to weaken in the wake of the Federal Reserve's (Fed) 50-basis-point rate cut. The Fed's decision to cut rates was driven by concerns about slowing global economic growth and rising unemployment.
Economic projections for Australia remain uncertain. Despite mixed indicators, the Reserve Bank of Australia (RBA) remains cautious due to elevated inflation. As a result, financial markets currently anticipate a modest 25-basis-point reduction in interest rates in 2024, reflecting the RBA's intention to maintain a hawkish monetary stance to combat inflationary pressures.
Daily digest market movers: Australian Dollar rising while markets punish the USD after Fed, Australian labor data
- The US dollar (USD) weakened on Thursday due to increased selling interest after the Federal Reserve's decision to lower interest rates more than expected.
- Gains in copper and iron ore prices also supported the AUD, although concerns about China's housing and industrial sectors may limit upside potential.
- The Reserve Bank of Australia (RBA) kept its Official Cash Rate (OCR) steady at 4.35% last month, indicating a cautious approach amid ongoing inflationary pressures.
- RBA Governor Michelle Bullock reiterated a cautious outlook, suggesting that rate cuts are unlikely in the near future.
- Despite the RBA's hawkish stance, the market anticipates rate cuts in late 2024, with a 70% probability of a 25-basis-point cut by December.
- A mixed labour market report in Australia for August showed an unchanged Unemployment Rate of 4.2%, while Employment Change increased by 47.5K individuals.
AUD/USD technical outlook: Pair embraces bullish bias indicators positive
Indicators continue to gain ground with the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicating rising buying traction. In addition, with the pair at its highest level since January, the outlook is positive. Buyers now must retain the 0.6800 area.
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.