Australian Dollar retreats, RBA policy decisions still in focus
- Australian Dollar has lost some momentum in recent sessions despite RBA’s hawkish hold.
- Treasury yields benefit US Dollar on Thursday.
- Australian economy's next crucial data set will be released in Friday's session with the June Judo PMI figures from Australia.
In Thursday's session, the Australian Dollar (AUD) met with some losses against its peers. This development follows the AUD/USD’s retreat after two consecutive sessions of gains heading toward 0.6670, ultimately succumbing to higher US Treasury yields that boost the USD.
Signs of fragility are emerging in the Australian economy, however, persistently high inflation is causing the Reserve Bank of Australia (RBA) to postpone potential rate cuts, potentially mitigating further losses. The RBA is primed to be among the last G10 nations to initiate rate cuts, a situation that might perpetuate the Aussie's gains.
Daily digest market movers: Australian Dollar consolidates RBA gains, eyes on PMIs
- RBA once more demonstrated a hawkish hold, retaining the official cash rate (OCR) at 4.35% without committing to a particular future stance, echoing their phrase “the Board is not ruling anything in or out.”
- In her subsequent press conference, Governor Bullock reiterated the Board’s discussions about potential rate hikes and dismissed considerations of rate cuts in the near term.
- In light of this, the RBA expressed readiness to do "what is necessary" to guide inflation back within target parameters.
- Market anticipates nearly 50 bps of easing by December 2025, while rate hikes in August and September are yet to be ruled out.
- Further indications will come from upcoming preliminary data from Australia’s Judo Bank Purchasing Managers Index (PMI) set for release on Friday.
- Expected signs of revival in the Australian economy might command the RBA to delay rate cuts, potentially uplifting the Australian Dollar against the USD.
- US Treasury yields saw a considerable rise, with gains exceeding 1%. The 2-year, 5-year and 10-year rates stood at 4.74%, 4.29%, and 4.27%, respectively, and seem to be driving demand toward the USD.
Technical analysis: Bullish signals ease off, confirmation still on hold
On the technical front, indicators are losing some intensity despite the recovery of the Relative Strength Index (RSI), which has surged back above 50, while the Moving Average Convergence Divergence (MACD) charts a fresh green bar.
However, it's worth mentioning that these are still buy signals. For a more solid buying confirmation, the AUD/USD pair needs to fully anchor itself above the 20-day Simple Moving Average (SMA). In that sense,sellers might retest the support in the next few sessions to test its strength.
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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