AUD/USD trades firmly above 0.6600 on US government shutdown
- AUD/USD demonstrates strength around 0.6620 as the US Dollar underperforms amid US government shutdown.
- US ADP Employment Change data will be significant for speculation towards the Fed’s monetary policy outlook.
- The RBA kept its OCR steady at 3.6% on Tuesday.
The AUD/USD pair holds onto gains near 0.6620 during the European trading session on Wednesday. The Aussie pair demonstrates strength as the US Dollar (USD) continues to face selling pressure, with Washington entering a shutdown.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades lower to near 97.70.
In Tuesday’s midnight, government funding expired after Republicans failed to pursuade Democrats to support the short-term funding bill in the House of Senate, which was expected to extend shutdown deadline to November 21.
The impact of partial US government closure will be significant on the Federal Reserve’s (Fed) decision in the monetary policy meeting later this month, as the majority of key economic data releases, including Nonfarm Payrolls (NFP) data, would halt. Such a scenario increases the significance of the ADP Employment Change data for September, which will be published at 12:15 GMT.
In the September monetary policy, the Fed reduced interest rates by 25 basis points (bps) to 4.00%-4.25%, citing labor market risks.
Economists expect US private employers to have added 50K fresh workers, slightly lower than 54K IN August.
Meanwhile, the Australian Dollar (AUD) struggles to extend Tuesday’s gains that were driven by the Reserve Bank of Australia’s (RBA) monetary policy announcement. On Tuesday, the RBA held its Official Cash Rate (OCR) steady at 3.6% and signaled no urgency for interest rate cuts.
RBA Governor Michelle Bowman also warned that inflationary pressures could prove to be persistent in the near term. “Components of monthly Consumer Price Index (CPI) are little higher than expected, inflation is not running away,” Bullock said.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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