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. No significant highlights were detected from the Australian economy on Friday, while 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. 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. 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.
