- In Asian markets on Monday, the Australian dollar continued to fall as the US dollar strengthened.
- A hawkish Fed stance and challenges in China’s economic recovery are weighing on AUD/USD.
- Attention will be on the Reserve Bank of Australia’s (RBA) interest rate decision on Tuesday, although no changes to rates are expected.
The Australian dollar (AUD) fell for a third straight day on Monday as the US dollar (USD) strengthened broadly, supported by the prospect of US interest rates remaining high for an extended period, with the median forecast from Federal Reserve officials predicting one rate cut this year.
Additionally, China accounts for one-third of Australia’s exports, so the latest mixed Chinese economic data and some challenges to China’s economic activity could put selling pressure on the AUD. Investors will be closely watching the Reserve Bank of Australia (RBA) interest rate decision on Tuesday and Governor Michelle Blok’s press conference. A hawkish rate hold from the RBA could boost the AUD in the short term and limit the decline in AUD/USD. In the US, retail sales figures for May are due to be released and are expected to improve to 0.3% from 0% in April.
Daily Digest Market Trends: Australian dollar under selling pressure ahead of RBA policy meeting
- Economists surveyed by Bloomberg predicted the Reserve Bank of Australia (RBA) is likely to keep interest rates on hold at 4.35% for a fifth consecutive meeting as it tries to rein in consumer prices that have been underpinned by an extremely tight labor market.
- China’s retail sales rose 3.7% year-on-year in May, up from 2.3% in April and beating the expected 3.0% increase, while industrial production rose 5.6% year-on-year in the same period, up from a previous 6.7% increase and below market expectations of 6.0%, the National Bureau of Statistics (NBS) said on Monday.
- The University of Michigan’s preliminary June consumer confidence index fell to 65.6 from 69.1, below the market consensus of 72.
- The UoM’s one-year consumer inflation expectations remained stable at 3.3%, while the five-year inflation outlook rose to 3.1% from 3%.
- Minneapolis Federal Reserve President Neel Kashkari said Sunday that it was a “reasonable expectation” that the central bank would wait until December to cut interest rates. Kashkari added that the Fed is in a very good position to get more data before making a decision.
- Cleveland Fed President Loretta Mester said Friday she would like to see good inflation data, adding that it may take longer than expected to reach the Fed’s 2.0% inflation target.
Technical analysis: AUD/USD positive stance remains fragile in the long term
The Australian Dollar is trading weakly on the day. The bullish outlook for the AUD/USD pair looks fragile as it continues to hover around the crucial 100-day Exponential Moving Average (EMA) on the daily chart. As mentioned earlier, if the pair breaks below the key EMA, it could resume its downtrend. Moreover, the 14-day Relative Strength Index (RSI) is below the 50 midline, indicating that further declines cannot be ruled out for the time being.
The key support level for AUD/USD emerges in the 0.6580 to 0.6585 region, which represents the confluence of the 100-day EMA and the lower Bollinger band. A decisive breakdown below this level could see a drop to the March 22 low of 0.6510. Additional downward filters to look out for are the May 1 low of 0.6465 and finally the psychological level and April 17 low of 0.6400.
On the upside, the immediate resistance lies at the upper Bollinger band at 0.6688. Further north, the next upside target is the May 16 high at 0.6715. The next hurdle to watch is the January 4 high at 0.6760.
Australian Dollar Price This Week
The table below shows the percentage change of the Australian Dollar (AUD) and major listed currencies this week. The Australian Dollar was the weakest currency against the Japanese Yen.
| USD | EUR | GBP | CAD | Australian Dollar | JPY | NZD | Swiss franc | |
| USD | -0.03% | 0.00% | 0.06% | 0.10% | -0.12% | 0.16% | -0.04% | |
| EUR | 0.03% | 0.02% | 0.08% | 0.12% | -0.07% | 0.17% | -0.01% | |
| GBP | 0.00% | -0.01% | 0.05% | 0.10% | -0.09% | 0.14% | -0.04% | |
| CAD | -0.06% | -0.08% | -0.05% | 0.08% | -0.14% | 0.10% | -0.08% | |
| Australian Dollar | -0.10% | -0.15% | -0.12% | -0.06% | -0.22% | 0.03% | -0.18% | |
| JPY | 0.10% | 0.07% | 0.09% | 0.18% | 0.23% | 0.27% | 0.04% | |
| NZD | -0.16% | -0.19% | -0.15% | -0.10% | -0.06% | -0.27% | -0.18% | |
| Swiss franc | 0.02% | 0.00% | 0.02% | 0.08% | 0.12% | -0.06% | 0.17% |
The heat map displays the percentage change between major currencies. The base currency is selected from the left column and the quote currency is selected from the top row. For example, if you select Euro from the left column and move it along the horizontal line to Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
RBA FAQ
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy in Australia. Decisions are made at 11 board meetings per year and ad-hoc emergency meetings as necessary. The RBA’s primary mission is to maintain price stability (i.e. inflation between 2-3%), but also to “contribute to monetary stability, full employment and the economic prosperity and well-being of the Australian people”. Its main tool for achieving this goal is to raise or lower interest rates. Relatively higher interest rates will strengthen the Australian dollar (AUD) and vice versa. The RBA’s other tools include quantitative easing and tightening.
Inflation has always been considered a negative factor for currencies as it generally reduces the value of money, but the opposite has become true in modern times due to the relaxation of cross-border capital controls. Moderately high inflation tends to cause central banks to raise interest rates, which has the effect of increasing capital inflows from investors around the world looking for a favorable place to park their funds. This increases the demand for the local currency, which in Australia’s case is the Australian dollar.
Macroeconomic data measures the health of the economy and can affect the value of the currency. Investors prefer to put their capital into a safe and growing economy rather than an unstable and contracting one. Increased capital inflows increase aggregate demand and the value of the domestic currency. Common indicators such as GDP, manufacturing and services PMI, employment, and consumer sentiment surveys can affect the AUD. If the economy is doing well, the Reserve Bank of Australia may raise interest rates, supporting the AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates fails 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) to buy assets (usually government or corporate bonds) from financial institutions, providing them with much-needed liquidity. QE typically weakens the AUD.
Quantitative tightening (QT) is the opposite of QE. It is implemented after QE when the economic recovery is underway and inflation starts to rise. In QE, the Reserve Bank of Australia (RBA) provides liquidity by purchasing government and corporate bonds from financial institutions, but in QT, the RBA stops purchasing any more assets and stops reinvesting the principal of maturing bonds it already holds. This will be positive (or bullish) for the Australian dollar.
