AUD/USD eases from 0.6573 with RBA’s monetary policy on focus
- The Aussie Dollar trims gains and returns to 0.6560 from intraday highs at 0.6573.
- The RBA is widely expected to keep interest rates unchanged at 3.6% on Tuesday.
- Investors' fears of a potential federal government shutdown in the US have hammered the USD earlier today.
The Aussie Dollar is trimming some gains ahead of the US Session opening on Monday. The pair remains positive for the second consecutive day, but price action has pulled back to 0.6260 from daily highs above 0.6270 earlier today.
Aussie rallies are likely to remain limited ahead of the Reserve Bank of Australia’s monetary policy decision, due on Tuesday. The bank is widely expected to leave its benchmark interest rate unchanged at 3.6% but the bank’s statement and Governor Bullock’s press release will be carefully analysed for hints about the near-term monetary policy and boost Aussie volatility.
Fears of a US government shutdown are weighing on the USD
In the US, all eyes will be on the meeting of US President Trump with the Congressional leaders to avoid a potential Government shutdown on Wednesday. The chances of a last-minute agreement, however, seem remote as the positions of the major parties remain far apart.
Against this background, the hawkish comments from Cleveland Fed President Beth Hammack defending the need for a restrictive monetary policy have hardly impacted the US Dollar.
Hammock warned about the negative impact on the GDP of a potential government closure, but said that inflationary risks remain elevated while the labour market is broadly balanced, which forces the central bank to keep interest rates higher for longer.
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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