Australian Dollar gathers ground as markets digest Retail Sales from Australia and FOMC mintues

July 3, 2024 8:38 pm

  • AUD/USD bulls step in as pair soars to multi-month highs.
  • May’s strong Retail Sales figures from Australia and weak US ADP data are driving the pair.
  • FOMC Minutes reveal members admitting that price pressure is easing.

The Australian Dollar (AUD) soared against the USD to its highest level since January following the report of soft labor market figures from the US and strong Retail Sales data from Australia earlier in the session.

The Australian economy continues to show mixed signs. Nonetheless, persistent high inflation is causing the Reserve Bank of Australia (RBA) to postpone potential rate cuts. As one of the last G10 central banks to initiate rate reductions, this might somewhat extend the gains of the Aussie.

Updated daily market movers: Aussie soars on strong Retail Sales and soft ADPs from US

  • Retail Sales figures for May from Australia showed a better-than-expected increase of 0.6% MoM compared to a 0.1% rise in April, boosted by early end-of-financial-year promotions and sales events.
  • Market is now factoring in nearly 40% odds of a 25-basis-point rate hike on September 24, rising to roughly 50% for November 5, making these events key to monitoring.
  • On Tuesday, Minutes from the June meeting provided a more nuanced perspective on the RBA’s hold stance. A major reason for bank members favoring keeping the policy rate unchanged rather than implementing an increase was due to “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress.”
  • However, Minutes reflected that the bank left door open for a hike.
  • On the US front, private sector employment in the US reported by ADP came in at 150K, lower than the 160K expected, and showed signs of a cooling labor market.
  • Regarding Federal Reserve (Fed) expectations, markets are now more confident of a cut in September, betting on nearly 70% odds.
  • FOMC Minutes give reason for the market to hope as they showed that members are acknowledging a cooldown of inflation.

Technical analysis: AUD/USD finds momentum, outlook in favor of the bulls now

After the pair traded sideways since mid-May within the range of 0.6600-0.6700, the AUD/USD has soared above 0.6700 for the first time since January. Indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) leaped further in positive terrain.

On the downside, the 20-day Simple Moving Average (SMA) at 0.6640 provides firm support, with further backstop at levels 0.6620 and the psychological threshold of 0.6600. Resistance stands at 0.6730 and 0.6750.

RBA FAQs

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.

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.

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.

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.

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.

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