Australian Dollar declines on stronger US Dollar
- US Dollar recovers amid conflict in the Middle East.
- US NFP data last week tempered aggressive easing bets on the Fed.
- Reserve Bank of Australia's Meeting Minutes of September policy meeting might stop the bleeding.
The AUD/USD pair declined by 0.50% to 0.6765 on Monday, pressured by a stronger US Dollar and concerns over geopolitical tensions in the Middle East.
The Australian economy faces an uncertain future amid conflicting economic signals. Despite healthy employment levels and strong consumer spending, inflation remains stubbornly high. The Reserve Bank of Australia (RBA) has adopted a cautious approach. This week’s minutes will be closely followed.
Daily digest market movers: Australian Dollar declines, while US Dollar gains ahead of packed week
- AUD declined amid Middle East tensions, pressuring risk-sensitive currencies due to rising oil prices.
- USD strengthened with the DXY near 102.00, boosted by strong upcoming US Nonfarm Payrolls data and cooling easing bets on the Fed.
- The likelihood of a 50-basis-point reduction in November or December has diminished to zero, while there is only a 90% chance of a 25-basis-point cut next month being factored in.
- Even with robust economic data, the market continues to expect a total easing of 125 basis points over the next year.
- Fed speakers and Consumer Price Index (CPI) data from the US will guide the pair’s trajectory this week.
AUD/USD technical outlook: Pair extends losses, 20-day SMA gone
The AUD/USD extends its losses, and indicators are weak with the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) deep in negative terrain. In addition, the loss of the 20-day SMA has worsened the outlook for the pair.
Supports line up at 0.6750, 0.6730 and 0.6700, while resistances are seen at 0.6800, 0.6815 and 0.6850.
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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