Australian Dollar takes a breather, dovish bets on the Fed limits downside

July 8, 2024 7:12 pm

  • Despite minimal losses, the AUD/USD remains at its highest level since January, just below 0.6740.
  • RBA’s hawkish interest rate stance supports the Aussie.
  • Week’s highlight will be inflation figures from the US on Thursday.

The Australian Dollar (AUD) saw some losses on Monday against the USD, which still remains weak after last week’s data, which fueled dovish expectations for the Federal Reserve (Fed). With the pair maintaining its highest level since early January, the upside for the Aussie is limited by strong data reported last week along with the Reserve Bank of Australia’s (RBA) hawkish stance.

The RBA appears set to be one of the final G10 countries’ central banks to initiate cuts, which should continue to support AUD as it might benefit from monetary policy divergences.

Daily digest market movers: AUD benefited by monetary policy divergences, eyes on US CPI

  • US CPI will be reported on Thursday. The headline is expected to decrease slightly to 3.1% YoY, while the core is predicted to remain steady at 3.4% YoY.
  • Potential easing by the Fed, juxtaposed with the likely extended restrictive stance of the RBA, could bolster the AUD/USD in coming months.
  • Still, concerns about slow momentum of Chinese economy may hinder a sustained recovery of the Australian currency.
  • This week doesn’t offer any major events on Australia’s calendar, and the AUD is forecast to hold its gains against its competitors as long as the RBA maintains its hawkish stance.
  • On the Fed’s side, there’s a 70% chance of a September rate cut, contingent on future data with markets seriously betting on a hike this year by the RBA.

Technical analysis: AUD/USD concedes some ground, further correction possible

The AUD/USD lost ground on Monday, but the overall outlook is positive, backed by deep positive territories on the technical indicators Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). With the pair securing a four-day winning streak and reaching its highs since January, the bulls confirmed a bullish outlook last week.

Nevertheless, traders should pay attention to possible overbought conditions, suggesting a slight correction might be imminent.The next bullish targets are at 0.6750 and 0.6780, while support levels to monitor 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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