Australian Dollar declines on Friday despite hawkish RBA
- AUD/USD falls and struggles to gain ground against the USD.
- US Nonfarm Payrolls disappoint with 142K new jobs added, below the 160K estimate.
- RBA's hawkish stance suggests no imminent rate cuts, which might support the AUD.
The AUD/USD declined by 0.85% in Friday's session, now hovering near the 0.6700 level following the release of the US Nonfarm Payrolls (NFP) report for August. However, the hawkish stance of the Reserve Bank of Australia (RBA), suggests that no imminent rate cuts are likely, which might limit the downside to the Australian Dollar.
The economic prospects for Australia are uncertain, and the Reserve Bank of Australia's aggressive stance to combat rising inflation has led to market expectations of only a 0.25% interest rate cut in 2024.
Daily digest market movers: Australian Dollar declines against US Dollar after mixed US job data
- US NFP report shows weaker-than-expected job growth, with 142K fresh payrolls against expectations of 160K.
- Unemployment Rate fell to 4.2% as anticipated, from the prior 4.3%.
- Following the data, the likelihood of the Fed starting interest rate cuts this month remained steady, with a 45% chance of a 50 bps reduction to 4.75%-5.00%.
- On the other hand, RBA Governor Bullock's hawkish stance reinforces the belief that interest rates will remain unchanged in the short term.
- Withhile monetary policy divergences between the Fed and RBA becoming ever clearer, the downside for the Aussie is limited.
AUD/USD technical outlook: Bearish momentum tests support at 0.6650
The pair has been in a downtrend since early September and is now testing the key support level of 0.6670. A break below this level could lead to further losses in the coming days.
The Relative Strength Index (RSI) is currently in the negative area and is sloping sharply downward, indicating that the bears are in control of the market. The Moving Average Convergence Divergence (MACD) is also bearish, which confirms mounting selling pressure.
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.
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