- The Australian dollar has stalled on the third day of its rally against the US dollar.
- Strong US wages keep the inflation flame alive, supporting the likelihood of a US rate hike and thus the dollar.
- The Australian dollar is expected to lose a source of support as China slows down and diversifies its sources of raw materials out of Oz.
He Australian dollar (AUD) stalled in his advance against the US dollar (USD) on Monday, while the USD rallied on slightly higher odds of the Federal Reserve (Fed) raising interest rates in September.
US labor market data for July was mixed: while the headline figure showed slightly lower-than-expected employment growth, wages rose more than expected, possibly triggering a latent pick-up in inflation expectations .
The CME’s FedWatch tool, a reliable market-based indicator of future Fed interest rate decisions, on Monday put the odds of the Fed raising interest rates in September at 15.5%, up slightly above the 13% registered on Friday.
Given that higher interest rates are positive for sovereign currencies, because they attract more foreign capital inflows, the slightly higher probability of a Fed hike in September is positive for the USD (the opposite for AUD/USD). ).
AUD/USD is trading little changed at 0.65 at the start of the US session.
News about the Australian dollar and movements in the markets
- The Australian dollar loses steam in its brief rally against the US dollar, as the latter remains strong at the start of the week on slightly higher odds of a rate hike at the next Fed meeting in September.
- Wage data for July from the US Nonfarm Payrolls report beat forecasts, coming in at 0.4%m/m and 4.4%y/y, beating estimates of 0.3% and 4.2% respectively. This may be having a lagging effect on the market’s response to the data and fueling higher inflation expectations, which may be pushing up interest rate expectations.
- The US unemployment rate also fell to 3.5% from the flat 3.6% forecast, another positive indicator.
- US Consumer Price Index (CPI) data on Thursday could further affect interest rate expectations and the dollar.
- Iron ore, Australia’s main export, has recovered somewhat. Chinese iron ore Futures (62%) rise to $105 a tonne from $104 on Friday.
- According to Clifford Bennett, Chief Economist at ACY TD Securities, China’s expressed policy of trying to diversify away from being overly reliant on Australian commodities is negative for the AUD in the long run.
- Cracks are also appearing in China’s trade data suggesting the Chinese economy is experiencing a slowdown in demand, which could have negative repercussions for Australia, Bennett adds.
- The Chinese Trade Balance data for July, which is released on Tuesday, could provide new information on how Chinese trade is performing.
- The Australian economy will not be “saved” as in the past by Chinese supergrowth, according to ACY’s Bennett.
- Australia’s main export to China, iron ore is used to make steel for huge infrastructure and construction projects; however, given the weakness seen in the Chinese property market, demand for this major source could falter, weakening the AUD.
- Whether the Federal Reserve has finished raising interest rates is still in dispute; however, the Fed’s Williams said on Monday that the Fed could cut rates next year.
- Expectations are more certain that the Reserve Bank of Australia (RBA) will not raise interest rates. It has gone through two breaks in a row and the Australian property market continues to reel from the effects of rate hikes so far. According to ACY’s Bennett, a sizeable proportion of homeowners are in negative equity due to the cooling property market in Australia, suggesting the RBA is unlikely to hike rates any further.
- Australian Retail Sales have fallen as inflation and rising mortgage payments hit consumer pockets, threatening a slowdown in Australia that will put downward pressure on the Aussie. Instead, the US is expected to enter a mini-boom thanks to the AI ​​revolution, according to the ACY Economist.
- The Australian dollar has been in a weak position since the RBA left the policy rate unchanged at 4.1% last week, against market expectations for a 25 basis point hike. In the monetary policy statement, the RBA explained that the decision to keep rates unchanged would give them more time to assess the impact of monetary policy tightening to date and the economic outlook.
- That said, they did not completely rule out the possibility of further rate hikes in the future: “Further monetary policy tightening may be needed to ensure inflation returns to target within a reasonable time frame, but that will depend on the data and the evolution of risk assessment,” the RBA noted.
Australian Dollar Technical Analysis
The AUD/USD pair is following a sideways trend on long- and medium-term charts. The February high at 0.7158 is a key hurdle which, if cleared, will set the longer-term charts more bullish.
The 0.6458 low set in June is a key level for bears. If broken out strongly, the charts would be more bearish in tone. Currently, the price is closer to this key low.
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Australian Dollar vs. US Dollar: Weekly Chart
Price has cleanly broken below the MA confluence near 0.6700, made up of most of the major SMAs: the 50-week, 50-day, and 100-day SMAs. The break of this key support and resistance level is a bearish sign.
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Australian Dollar vs. US Dollar: Daily Chart
AUD/USD has also broken below the June lows at 0.6600, and a continuation lower towards the key May lows at 0.6460 is very possible. A decisive break below them would open the way for a move lower towards 0.6170 and the 2022 lows.
The current rally move from last Thursday’s lows looks more like a correction than a reversal and the price could easily recap and start moving lower again.
Because the pair is in a sideways trend in general, it is unpredictable and the odds favor neither bears nor bulls in general, nor does the RSI provide much information on either time frame.
In technical terms, a “decisive breakout” consists of a long daily candlestick, which pierces cleanly above or below the critical level in question, and then closes near the high or low of the day. It can also mean three consecutive days up or down that break cleanly above or below the level, with the last day closing near its high or low and a decent distance from the level.
AUD FAQ
What factors determine the price of the Australian dollar?
One of the most important factors for the Australian dollar (AUD) is the level of interest rates that are set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor is the price of its biggest export, iron ore. The health of the Chinese economy, its biggest trading partner, is a factor, as is inflation in Australia, its growth rate and the trade balance. Market sentiment also plays a role, ie whether investors bet on riskier assets (risk aversion) or seek safe havens (risk aversion), with risk appetite being positive for the AUD.
How do the decisions of the Reserve Bank of Australia affect the Australian dollar?
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 objective 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 ones. The RBA may also use QE and tightening to influence credit conditions, the former being AUD negative and the latter being AUD positive.
How does the health of the Chinese economy influence the Australian dollar?
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives its value up. The opposite occurs when the Chinese economy does not grow as fast as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian dollar and its peers.
How does the price of iron ore affect the Australian dollar?
Iron ore is Australia’s biggest export, at $118 billion a year according to 2021 data, with China being its main destination. The Iron Ore price, therefore, may be a driver for the Australian Dollar. Typically, if the price of iron ore goes up, the AUD goes up as well, as aggregate demand for the currency increases. The opposite occurs if the price of iron ore falls. Higher iron ore prices also tend to lead to a higher probability of a positive Balance of Trade for Australia, which is also AUD positive.
How does the trade balance affect the Australian dollar?
The Balance of Trade, which is the difference between what a country earns from its exports and 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, its currency will gain value solely from the excess demand created by foreign buyers wanting to buy its exports versus what it spends buying imports. Therefore, a positive Net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
