AUD/USD trims gains and nears 0.6500 on hesitant markets
- The Aussie pulls back from weekly highs against the US Dollar, although it remains above 0.6500.
- Hawkish comments by RBA's Hauser and strong Australian consumer sentiment have supported the AUD.
- Investors are looking from the sidelines, awaiting news on US government funding.
The Australian Dollar is trading moderately lower against the US Dollar on Tuesday, retreating from Monday’s highs at 0.6540, and reaching session lows at 0.6514 during the European morning session. A mild risk-on mood is failing to provide significant support to the Aussie, although the flat US Dollar Index is keeping the AUD close to weekly highs
News that the US Senate passed a bill to resume US government funding and end the largest shutdown in history boosted risk appetite during Monday's US session. Investors, however, seem to be looking from the sidelines on Tuesday, awaiting further developments to place directional bets.
Hawkish RBA comments support the Aussie
Also on Monday, the Reserve Bank of Australia Deputy Governor, Andrew Hauser, provided a fresh boost to the Aussie, highlighting the country’s economic recovery, and warning that further monetary easing would reignite inflationary pressures.
The latest Wersrtpac Consumer Sentiment figures, released on Monday, revealed a 12.8% improvement to 103.8 in November, reversing the 3.8% decline posted in October and endorsing Hauser's comments about a brighter economic outlook.
In the US, Federal Reserve (Fed) speakers remained divided about the forward guidance, while on Tuesday, all eyes are on the development of the US government funding bill, which will be sent to the House of Representatives. The House's Republican majority is expected to approve it seamlessly, before US President Donald Trump signs it, probably on Wednesday.
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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