Australian Dollar extends losses, hawkish bets on RBA support

July 9, 2024 8:02 pm

  • AUD extended its decline on Tuesday against the USD.
  • RBA’s hawkish position on policy provides noticeable support to the Aussie.
  • Markets are digesting Jerome Powell’s cautious words, which gave the USD some traction.
  • Focus this week will be the reveal of US inflation figures on Thursday.

The Australian Dollar (AUD) racked up more losses on Tuesday against the USD, which managed to gain some ground due to cautious remarks by Jerome Powell. Nevertheless, the pair still maintains a strong position at its highest level since January. The downside for the Aussie appears to be limited, due to strong data reported last week and the continued hawkish stance of the Reserve Bank of Australia (RBA).

The RBA is likely to be one of the last G10 countries’ central banks to initiate rate cuts, which should continue to work favorably for the AUD through monetary policy divergence.

Updated daily market movers: AUD sees further losses, attention on Powell and US CPI

  • Fed Chair Jerome Powell’s Semiannual Monetary Policy Report to Congress saw him acknowledging progress on inflation but that the bank needs data to embrace cuts.
  • US CPI is set to be reported on Thursday. The headline is expected to decrease slightly to 3.1% YoY, while the core is anticipated to remain steady at 3.4% YoY.
  • This week holds no significant events on Australia’s calendar, and the AUD is projected to retain its gains against its competitors as long as the RBA sustains its hawkish stance.
  • On the Fed’s side, there’s now less than a 10% chance of a cut for their next meeting at the end of July and around an 80% chance for a cut in September, contingent on future data.
  • On the RBA’s side, there’s almost a 50% chance of a September or November rate hike, with the market seriously betting on it.

Technical analysis: AUD/USD’s struggle continues, but further correction possible

The AUD/USD continues on its losing path, marking a two-day losing streak on Tuesday, but the overall outlook remains positive. This is backed by deep positive territory on the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Having reached near-highs since January, the pair’s performance last week has signaled a bullish outlook, but buyers seem to be booking profits.

The next bullish targets are set at 0.6730 and 0.6750, while support levels to keep an eye on are at 0.6670, 0.6650 and 0.6630.

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.

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