AUD/USD trims losses, returns to 0.6600 as US Dollar recovery stalls
- The Aussie attempts to pick up from lows against the USD and returns above 0.6600.
- The pair remains on its back foot, with the US Dollar supported by strong US data.
- Weak Australian employment numbers have raised speculation of a surprise rate cut by the RBA.
The Australian Dollar returned to levels right above the 0.6600 level against the USD, after finding support at the 0.8590 area in Friday’s early European session. The pair, however, maintains its immediate bearish trend intact, on track to a 0.6% weekly loss.
Weaker-than-expected Australian labour data raised some speculation about the possibility of a surprise rate cut later this month, and sent the Aussie Dollar lower against its main peers.
Net employment fell by 5.4K in August, against market expectations of a 22K increase and following a 26.5K growth in July. The sharp decline in full-time employment has been partially offset by the rise in part-time jobs, and the Unemployment rate remained steady at 4.2% but the feeling is that the labour market is losing momentum.
The USD appreciated further following US claims, manufacturing data
In the US, the Fed cut interest rates and hinted at further easing in the coming months, but Fed Chairman Jerome Powell adopted a more cautious tone, providing a fresh impetus to the US Dollar.
The Greenback’s recovery was further supported by a sharper-than-expected decline in weekly Jobless Claims, which fell by 33K to 231K in the second week of September, beating expectations, twice as much as the market consensus of a 14K decline.
Furthermore, the Philadelphia Fed Manufacturing Index revealed a sharper-than-expected recovery of the region’s sector activity. The Index bounced to 23.2, after a 0.3% contraction in August, bearing expectations of a more modest rebound, to 1.7. These figures did not dampen hopes of Fed easing, but have calmed fears of a sharp economic slowdown and underpinned the US Dollar’s rebound.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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