Australian Dollar expects losses ahead as RBA decision looms
- AUD/USD extended its decline in Monday's session as market gears up for RBA decision.
- Federal Reserve's projection of higher interest rates continues to bolster the USD.
- Australian and American economic calendars remain empty on Monday.
The Australian Dollar (AUD) experienced additional losses against the US Dollar (USD) on Monday as markets gear up for Tuesday’s Reserve Bank of Australia (RBA) decision.
The Australian economy shows some signs of weakness, but stubbornly high inflation is prompting the RBA to delay cuts, which may limit its decline. The RBA's meeting concludes on Tuesday when investors will look for further clues. Markets are pricing in the first rate cut only for May 2025.
Daily digest market movers: Australian Dollar sustains sell-off, markets await RBA's decision
- No significant highlights were detected from the Australian economy on Friday.
- Reserve Bank of Australia meets on Tuesday and is expected to keep rates steady at 4.35%.
- The RBA is expected to stick to its neutral policy guidance that the bank is not ruling anything in or out.
- Following the May 7 meeting, Governor Bullock confirmed that the board discussed the option of raising rates. This option will likely remain on the table as inflation doesn’t show signs of easing.
- Market fully projects in a cut at the February meeting.
- Market hopes for rate cuts have persistently clashed with the Fed’s rate cut expectations through 2024, and according to the CME’s FedWatch Tool, rate markets maintain over 60% odds of at least a 25 basis-point rate trim on September 18.
Technical analysis: Sellers persist as Aussie approaches key level
The Relative Strength Index (RSI) now sits below 50 and points downwards, indicating negative momentum. Meanwhile, the Moving Average Convergence Divergence (MACD) prints steady rising red bars hinting at persistent selling pressure.
The short-term outlook has turned negative as the pair fell below the 20-day Simple Moving Average (SMA) toward 0.6613, indicating a loss in buying steam. As sellers continue to advance, the area of 0.6560-0.6550 where the 100 and 200-day Simple Moving Averages (SMAs) converge might be retested.
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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