Australian Dollar extends losses ahead of RBA decision
- AUD/USD continues its decline as markets gear up for RBA’s decision next week.
- Federal Reserve's projection of higher interest rates continues to bolster USD.
- Australian calendar was empty on Friday, and USD suffers minimal intraday losses on soft UoM figures.
The Australian Dollar (AUD) experienced additional losses against the US Dollar (USD) despite strong labor market data from Australia reported earlier in the week, which prompted for a more hawkish Reserve Bank of Australia (RBA). The demand for the US seems to be growing thanks to interest rate revisions, which saw Federal Reserve (Fed) members forecasting fewer rate cuts this year. Additionally, the Greenback retained its strength despite soft University of Michigan (UoM) figures reported during the European session.
The Australian economy has shown signs of weakness yet the persistent high inflation is prompting the Reserve Bank of Australia (RBA) to delay cuts, which may limit its decline. The RBA meets next Tuesday, and investors will look for further clues. Markets are pricing the first rate cut only for May 2025. Still, risks are skewed toward an earlier start.
Daily digest market movers: Australian Dollar sustains sell-off, markets digest UoM figures from the US
- No significant highlights were detected from the Australian economy on Friday.
- On the US side, Consumer confidence deteriorated with the University of Michigan's Consumer Sentiment Index decreasing to 65.6 from 69.1 in May. This reading came in below market expectations of 72.
- The Current Conditions Index declined to 62.5 from 69.6, and the Consumer Expectations Index fell to 67.6 from 68.8.
- The survey details revealed that the one-year inflation expectation remained stable at 3.3%, while the five-year inflation outlook rose to 3.1% from 3%.
- Earlier in the week, stronger-than-expected Employment data for May bolstered speculation that the Reserve Bank of Australia (RBA) would maintain its Official Cash Rate at its current levels for the year.
- In addition, the Australian Unemployment Rate reduced to 4.0% as projected from 4.1% in April.
- On the Fed’s side, market hopes for rate cuts have persistently clashed with the Fed’s own rate cut expectations through 2024, and according to the CME’s FedWatch Tool, rate markets maintain over 60% odds of at least a 25 basis-point rate trim on September 18.
Technical analysis: AUD/USD sellers persist, outlook turns negative
The Relative Strength Index (RSI) now sits below 50 and points downwards indicating a negative momentum. Meanwhile, the Moving Average Convergence Divergence (MACD) prints steady rising red bars hinting at persistent selling pressure.
The short-term outlook has turned negative as the pair fell below the 20-day Simple Moving Average (SMA) toward 0.6613, indicating a loss in buying steam. If this trend continues, the 100 and 200-day Simple Moving Averages (SMAs) could serve as potential barriers around the 0.6560 area.
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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