Australian Dollar following mixed US Nonfarm Payrolls figures

July 5, 2024 8:40 pm

  • Rising US Unemployment figures had USD facing selling pressure.
  • Australia reported mixed housing data on Friday.
  • Monterey divergences between the Fed and RBA might push the pair up further.

The Australian Dollar (AUD) holds its ground against the USD on Friday, which weakened following soft US Nonfarm Payrolls (NFP) figures but stands at its highest level since early January at 0.6740.

The Reserve Bank of Australia (RBA) might be one of the final G10 central banks to initiate cuts, which should continue to support the Aussie amid these conditions. Despite signs of a weakening Australian economy, persistent inflation prompts the RBA to remain hawkish, and encouraging Retail Sales data reported earlier in the week depicts a strong economic outlook.

Updated daily market movers: AUD strength holds despite sluggish housing market

  • Housing loan commitments in Australia for March have risen up to 3.1% MoM, beating the expected 1.0% and a revised 1.9% from February.
  • However, this may signal a boost in house prices impacting average loan sizes, rather than an increase in demand for domiciles.
  • Current consumer sentiment surveys point toward sluggish buying sentiment in terms of housing.
  • Across the Pacific, US NFPs revealed a rise of 206K in June, exceeding the market expectation of 190K. This followed a revised 218K increase in May.
  • Nevertheless, these figures have not done much to bolster the USD, as the Unemployment Rate in the US has slightly risen to 4.1% from 4%.
  • Wage inflation, measured by the change in the Average Hourly Earnings, declined to 3.9% YoY, widely expected by markets.
  • On the RBA side, markets indicate a marginal 10% probability of a rate hike from the RBA before the end of the year.
  • On the Fed’s side, the market is fully pricing in two rate cuts by the end of the year, subject to the ongoing labor market data and inflation figures.

Technical analysis: AUD/USD maintains momentum, bullish outlook continues

The AUD/USD pair shows no signs of losing momentum, backed by the deep positive territory of technical indicators of the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). As the pair reaches its January highs, the bullish outlook is more promising. However, traders should monitor if the mentioned indicators start to flag overbought conditions.

The next bullish targets are the resistances at 00.6750 and 0.6800. Concurrently, the support levels to watch are 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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