Australian Dollar rebounds following RBA's hawkish hold

Source Fxstreet
Jun 18, 2024 18:31
  • AUD/USD recovered much of its previous losses in Tuesday’s session, following RBA decision.
  • USD started the week softly, and its declines extended following weak Retail Sales figures.
  • If the Fed and RBA policies diverge, the Aussie might see further gains.

The Australian Dollar (AUD) witnessed sizable gains against the US Dollar (USD) following Tuesday’s Reserve Bank of Australia (RBA) meeting, which concluded with a hawkish hold.

Despite the underlying weakness in the Australian economy, stubbornly high inflation has prompted the RBA to postpone rate cuts. On the US side, disinflation signals have boosted confidence in a September interest rate cut by the Federal Reserve (Fed).

Daily digest market movers: Australian Dollar buoyant after RBA’s hawkish hold

  • Reserve Bank of Australia, as widely expected, left the cash rate static at 4.35% and reiterated that “the Board is not ruling anything in or out.”
  • Furthermore, Governor Bullock confirmed that the board discussed rate hike options with a rate cut not being contemplated at this time.
  • Resolute tone surrounding Australia's inflation backdrop implies that threshold for policy easement remains high.
  • RBA disclosed that "inflation remains above target and proves persistent" and reiterated that "the Board anticipates it will be a while still before inflation is sustainably within the target range."
  • On the US front, the US Census Bureau released that Retail Sales, a crucial measure of household spending, grew at a slower-than-anticipated pace in May of 0.1% against the projected 0.2%.
  • Slower Retail Sales growth might create significant pressure on the US Dollar, as it is set to bolster investors' belief in the gradual disinflation process.
  • CME FedWatch Tool indicates higher probabilities of interest rates starting to decrease from the September meeting, with one or more rate cuts implied in November or December.

Technical analysis: Bullish signals gain traction, pending confirmation

The Relative Strength Index (RSI) has now risen above 50, signifying a shift in momentum. Concurrently, the Moving Average Convergence Divergence (MACD) registers shrinking red bars, hinting at declining selling pressure and a potential reversal.

However, the short-term outlook remains negative unless buyers consolidate above the 20-day Simple Moving Average (SMA) now set at 0.6640. As the AUD/USD struggles with the 20-day SMA, investors should continue to monitor the region of 0.6560-0.6550, where the 100-day and 200-day Simple Moving Averages (SMAs) meet. That support level might be retested in the upcoming sessions if bulls fail to confirm their surge.

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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