Australian Dollar continues soft ahead of key Australian data
- Aussie remains weak as markets await inflation data, Retail Sales from Australia.
- Soft China outlook generates concerns for Australian economy.
- RBA’s hawkish outlook might bail out the Aussie.
The Aussie continues the week on a soft trajectory with the AUD/USD declining by 0.20% to 0.6535 ahead of Retail Sales and inflation data that will guide market expectations further on the Reserve Bank of Australia’s (RBA) next moves. In the meantime, the economic concerns tied to the Chinese economy keep the Australian currency restrained.
With the Australian economy under pressure, inflation persistently above bounds continues to encourage the RBA to postpone rate cuts. According to forecasts, the RBA is expected to be among the tail-enders of the G10 nations who introduce a rate cut, which should limit the Aussie’s downside.
Daily digest market movers: Aussie expected to continue its weakness with anticipation of Inflation and Retail Sales data
- Perpetual 'risk-off' sentiment persists with Australia's economic bearing heavily influenced by worries over Chinese economic slowdowns. Attention will turn toward June's and Q2 CPI data on Wednesday.
- Similar to Q1, Australia’s Q2 headline Consumer Price Index (CPI) is projected to manifest a rise of 1.0% QoQ while anticipating an acceleration to 3.8% YoY from the previous 3.6%. Concurrently, the June headline CPI is predicted to drop to 3.8% YoY.
- With the inflation rate substantially outreaching the 2-3% target range, the RBA is projected not to hastily alter its policy. In that sense, the swaps market is seeing the first 25 bps cut next summer.
- Q2 will also watch the release of real Retail Sales data on Tuesday. Retail Sales volume for Q2 is predicted to show a less severe decline of 0.2% QoQ, comparatively lesser than Q1's 0.4%.
AUD/USD technical analysis: A sustained bearish outlook persists, fundamentals might help in short term
The AUD/USD's continuation below the 20, 100 and 200-day Simple Moving Average (SMA) poses concerns, hinting at a likely prolongment of the bearish trend.
While indicator signals are still deeply rooted in the negative, the oversold situation might lead to a correction. However, the bullish momentum remains weak, intimating at a potential period of sideways trade barring any fundamental catalysts. The mentioned inflation and Retail Sales figures might open the door for an upward move.
Key support levels have revamped to 0.6530 and 0.6500, while resistance levels remain at 0.6600 (200-day SMA), 0.6610 and 0.6630.
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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