- The Australian dollar fell for a second straight session on weak inflation data from Australia.
- Australia’s monthly CPI was 3.4% in December, down from 4.3% in November.
- Traders expect the Reserve Bank of Australia to cut interest rates twice in 2024.
- China’s non-manufacturing PMI and manufacturing PMI improved to 50.7 and 49.2, respectively, in January.
- The Fed is expected to keep interest rates unchanged at 5.5% for the fourth consecutive time.
The Australian dollar (AUD) continued its downward trend on Wednesday after Australian inflation slowed more than expected in the December quarter. As a result, traders are pricing in the possibility that the Reserve Bank of Australia (RBA) will cut interest rates up to two times during the year. Amid rising tensions in the Middle East, market participants are becoming more cautious, and a risk-off mood is spreading, putting further downward pressure on the Australian dollar/USD pair.
Australia’s monthly consumer price index (CPI) rose 3.4% year-on-year in December, but was down from 4.3% in November and below expectations of 3.7%. RBA trimmed average CPI (year-on-year) for the fourth quarter was 4.2%, down from the previously announced 5.2% and also below expectations of 4.3%. Meanwhile, the CPI (quarter-on-quarter) figure came in at 0.6%, slower than the expected 0.8% and a notable drop from the previous reading of 1.2%.
The Reserve Bank of Australia’s inflation target range is 2.0-3.0%. Although the current numbers are not within this target range, they represent a significant improvement compared to the peak CPI rate of nearly 8.0%. The RBA’s policy meeting is scheduled for February 5th and 6th, and is widely expected to decide to leave interest rates unchanged.
The China Federation of Logistics and Purchasing (CFLP) released its monthly non-manufacturing Purchasing Managers’ Index (PMI), showing improved performance in China’s service sector in January. The measured value was 50.7, slightly higher than the expected 50.6. At the same time, the manufacturing PMI also showed improvement, reaching 49.2, meeting expectations and rising from 49 the previous time. Given that Australia and China are close trading partners, these improved numbers could help limit losses for the Australian dollar.
The US dollar index (DXY) is facing challenges due to low US Treasury yields. US President Joe Biden’s administration is expected to authorize a military strike in response to recent drone attacks on US outposts in Jordan, potentially reinforcing risk-averse sentiment. Investors will focus on US ADP employment changes on Wednesday ahead of the US non-farm payrolls release later this week.
The US Federal Open Market Committee (FOMC) is widely expected to keep interest rates in the range of 5.25% to 5.50% for the fourth straight session at its Wednesday meeting. At the Federal Reserve’s December meeting, officials predicted three rate cuts in 2024. Investors are eagerly awaiting signals from Federal Reserve Chairman Jerome Powell. Interest rate swap markets are gradually extending expectations for rate cuts, with CME’s FedWatch tool showing there is a 43% chance the Fed will cut rates for the first time in March. By contrast, as of December, swaps had initially suggested the probability of a rate cut in March was more than 80%. Furthermore, there is a 53% probability that a 25bp rate cut will be carried out in May.
Daily Digest Market movers: Australian dollar falls on weak Australian inflation data
- Australia’s December retail sales (month-on-month) showed a decline of 2.7%. This figure was in contrast to the expected 0.9% decline and marked a notable reversal from the previous 2.0% increase.
- Australia’s manufacturing PMI rose from 47.6 to 50.3, indicating improvement. Services PMI also rose from 47.1 to 47.9. The headline PMI recorded an increase and reached 48.1 compared to 46.9 in December.
- The US balance sheet shows that from October 2023 onwards, lower yields are contributing to the sustainability of the US Treasury, and strong economic growth is leading to improved tax revenues. The U.S. Treasury recently announced plans to borrow $760 billion in the first quarter, lower than its previous forecast of $816 billion in October.
- The number of U.S. JOLTS jobs in December improved from 8.925 million to 9.026 million, exceeding the forecast of 8.75 million.
- The US home price index for November (month-on-month) remained unchanged at 0.3%.
- The US Core Personal Consumption Expenditure Price Index (PCE) in December rose 0.2% from the previous month, as expected, compared to the 0.1% increase recorded in the previous release. Annual core PCE rose 2.9%, lower than expectations of 3.0% and the previous reading of 3.2%.
- The annualized US gross domestic product (Q4) rate was 3.3%, compared with 4.9% previously, beating the market consensus of 2.0%.
Technical analysis: Australian dollar maintains position above key level 0.6550
The Australian dollar traded near $0.6560 on Wednesday, followed by last week’s low of $0.6551, matching a significant level at $0.6550. If this support is broken, the pair could retest the monthly low at 0.6524. On the upside, the AUD/USD pair may encounter first resistance at the psychological level of 0.6600, which coincides with the 23.6% Fibonacci retracement level of 0.6606. A break above the latter could allow the AUD/USD pair to test the 21-day exponential moving average (EMA) at 0.6622 and then the key resistance at 0.6650.
AUD/USD: daily chart
Australian dollar price today
The table below shows today’s percentage change in the Australian Dollar (AUD) against major listed currencies. The Australian dollar was the weakest against the US dollar.
| USD | EUR | GBP | CAD | australian dollar | JPY | new zealand dollar | Swiss franc | |
| USD | 0.23% | 0.13% | 0.13% | 0.36% | 0.25% | 0.25% | 0.14% | |
| EUR | -0.22% | -0.09% | -0.09% | 0.17% | 0.04% | 0.05% | -0.07% | |
| GBP | -0.12% | 0.10% | 0.01% | 0.25% | 0.13% | 0.14% | 0.03% | |
| CAD | -0.13% | 0.10% | -0.03% | 0.23% | 0.12% | 0.12% | 0.02% | |
| australian dollar | -0.37% | -0.15% | -0.24% | -0.24% | -0.12% | -0.12% | -0.23% | |
| JPY | -0.25% | -0.03% | -0.15% | -0.12% | 0.14% | -0.03% | -0.11% | |
| new zealand dollar | -0.26% | -0.01% | -0.14% | -0.13% | 0.10% | -0.01% | -0.11% | |
| Swiss franc | -0.14% | 0.07% | -0.03% | -0.01% | 0.22% | 0.11% | 0.12% |
The heat map shows 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 along the horizontal line to Japanese Yen, the percentage change displayed in the box represents EUR (base)/JPY (estimate).
RBA FAQ
The Reserve Bank of Australia (RBA) sets Australia’s interest rates and controls monetary policy. Decisions are made at the Board of Directors’ meetings held 11 times a year and at extraordinary emergency meetings as necessary. The RBA’s primary mission is to maintain price stability, or an inflation rate of 2% to 3%, but it also “contributes to monetary stability, full employment, economic prosperity and the well-being of Australians”. The main means of achieving this is by raising or lowering interest rates. If interest rates are relatively high, the Australian dollar (AUD) will appreciate, and vice versa. Other RBA tools include quantitative easing and monetary tightening.
While inflation has traditionally always been considered a negative factor for currencies, as it generally reduces the value of money, in modern times, with cross-border capital controls being relaxed, the opposite is actually true. Currently, as inflation rises slowly, central banks tend to raise interest rates, which in turn has the effect of further capital inflows from global investors looking for lucrative places to store their money. . This increases demand for the local currency (Aussie dollar in Australia’s case).
Macroeconomic data assesses the health of an economy and can influence the value of a currency. Investors prefer to invest their capital in safe and growing economies than in unstable and shrinking economies. Increased capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators such as GDP, manufacturing and services PMI, employment and consumer sentiment surveys can influence the Australian dollar. A strong economy could prompt the Reserve Bank of Australia to raise interest rates, which could also support the Australian dollar.
Quantitative easing (QE) is a tool used in extreme situations where lower interest rates alone are not sufficient to restore credit flow to the economy. QE is a process in which the Reserve Bank of Australia (RBA) prints Australian dollars (AUD) for the purpose of purchasing assets (usually government and corporate bonds) from financial institutions, providing them with the liquidity they need. QE typically results in a weaker Australian dollar.
Quantitative tightening (QT) is the opposite of QE. This is done after quantitative easing, when economic recovery is underway and inflation begins to rise. In QE, the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide liquidity, whereas in QT, the RBA stops purchasing further assets and limits the maturities of bonds it already owns. Stop reinvesting the principal you received. That would be positive (or bullish) for the Australian dollar.
