AUD/USD recovery stalls below 0.6545 as the market’s focus shifts to the Fed
- The Aussie recovery stalls below 06545, with downside attempts limited above 0.6500.
- A somewhat brighter market mood has weighed on the safe-haven US Dollar on Wednesday.
- The RBA's hawkish monetary policy decision boosted the Australian Dollar on Tuesday.
The Australian Dollar is posting marginal losses on Wednesday, trading within Tuesday’s range, as the positive impact from the hawkish RBA statement wore off, and investors shift their focus to the release of the FOMC minutes.
The risk-averse sentiment seen on previous days, following Trump's announcement of the first batch of tariff letters, appears to have waned on Wednesday, as the new August 1 deadline keeps some hopes of a significant breakthrough alive. This brighter sentiment is supporting the Aussie and weighing on the Safe-haven USD.
The Australian Dollar rallied on Tuesday after the Reserve Bank of Australia surprised markets by keeping its benchmark interest rate unchanged at 3.85%, against market expectations of a 25-basis-point rate cut to 3.6%.
The pair, however, remains unable to break above a previous support, now turned resistance at the 0.6545 area following a nearlu 1.5% fall last week, as Trump’s threat of a new round of tariffs hurt investors’ confidence in Australia’s trade-oriented economy.
The focus today shifts to the minutes of June’s Fed meeting, which are expected to provide further insight on the bank’s near-term decisions and some additional guidance for US Dollar crosses.
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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