AUD/USD nears weekly highs at 0.6560, with the US Dollar pulling back
- The Aussie Dollar appreciates further against a weaker US Dollar ahead of the US Payrolls release.
- Weak employment data seen earlier in the week and dovish Fedspeak are adding weight on the US Dollar.
- In Australia, upbeat Trade Balance numbers heightened expectations that the RBA will stand pat in September.
The Australian Dollar is accelerating its recovery against a weaker US Dollar on Friday, with all eyes on the US Nonfarm Payrolls report, due later on the day. The pair’s recovery from Thursday’s lows, at 0.6500, has extended to 0.6545 so far, approaching the top of the weekly range, at 0.6560.
Weak US employment data seen earlier in the week, coupled with a string of dovish-leaning Fed speakers, have boosted hopes of Fed monetary easing in September. In this context, traders are awaiting the August NFP report to confirm their views.
Soft labour figures, dovish Fed speakers are weighing on the USD
The market consensus anticipates a 75K increase in net employment in August, a similar reading to the 73K seen in July that prompted investors to ramp up rate cut bets and sent the US Dollar tumbling in early August
Employment data released on Thursday heightened expectations of a soft NFP reading today. ADP Employment anticipated a slowdown in employment creation, with 54K payrolls in August, the 65K forecasted by market analysts and half of July’s 106K increase. Likewise, the Weekly Jobless Claims rose by 237K, to their highest levels since June, and above the 230K claims expected.
In Australia, the wider-than-expected trade surplus figures released on Thursday eased concerns about the negative economic impact of the global trade uncertainty and strengthened the case for steady interest rates after September’s RBA meeting. Against this background, the monetary policy divergence is providing some support to the AUD.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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