Australian Dollar in decline as Judo PMIs weigh

Source Fxstreet
  • Australian Dollar has suffered extended declines in recent sessions as RBA gains slowly fade.
  • PMI figures from Australia reveal weaker-than-expected data.
  • Fragility in the Australian economy seems to be driving demand off the Aussie.

In Friday's session, the Australian Dollar (AUD) intensified its losses against its peers. The AUD/USD duo has been testing its notable support at the 0.6640 threshold, the 20-day Simple Moving Average (SMA). Selling pressure emerged from the Asian markets in light of soft June preliminary PMIs from Judo Bank in Australia. This weakness has been compounded by high US Treasury yields and optimistic PMI data from S&P in the US, lifting the USD.

Notwithstanding certain signs of frailty in Australia’s economic scene, the stubbornly high inflation continues to prompt the Reserve Bank of Australia (RBA) to delay potential rate cuts, potentially offsetting the Aussie's losses. The RBA is primed to be among the last G10 nation central banks to initiate rate cuts, which might perpetuate the Aussie's gains.

Daily digest market movers: Australian Dollar grapples with weakened data, awaits further cues

  • Australia reported weaker preliminary data from the June Purchasing Managers Index (PMI) set, with Manufacturing at 47.5 versus May's 49.7, Services at 51.0 against 52.5, and the Composite rate falling for a third consecutive month to 50.6, from 52.1 in May.
  • In contrast, US business activity in the private sector continued to showcase solid growth, with the S&P Global Composite PMI improving slightly to 54.6.
  • Governor Bullock, during her latest press conference, confirmed that the Board discussed potential rate hikes, dismissing considerations of rate cuts in the near term.
  • Bullock maintained, “Inflation remains above target and is proving persistent,” specifying that "the Board expects that it will be some time yet before inflation is sustainably in the target range."
  • RBA affirmed its 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 on the RBA’s side.
  • Fed signals only one cut in 2024, while markets continue to hope for a September cut.

Technical analysis: Signs of bullish strength waning, bears time now

The technical front reveals weakened momentum, with the Relative Strength Index (RSI) remaining above 50 but tilting downwards and the Moving Average Convergence Divergence (MACD) continuing to chart red bars. For further confirmation of a more solid buying stance, the AUD/USD pair needs to firmly support itself beyond the 20-day Simple Moving Average (SMA). Sellers might extend trials of the mentioned SMA support in ensuing sessions to test its resilience.

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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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