Australian Dollar receives support from divergent policy outlooks between central banks – FXStreet

• The Australian dollar strengthened as the RBA and Fed adopted diverging policy outlooks.
• The RBA's Financial Stability Review suggests that Australia's financial system remains resilient and risks are broadly contained.
• China plans to inject 1 trillion yuan of capital into its major banks.

The Australian dollar (AUD) recovered some of its recent losses against the US dollar (USD) on Thursday. The AUD/USD pair received support from the divergence in the monetary policy outlook of the two central banks. Additionally, the commodity-linked Australian dollar received support after its largest trading partner, China, announced new stimulus measures to jump-start its economy.

The Reserve Bank of Australia (RBA) on Tuesday kept its official central bank interest rate (OCR) unchanged at 4.35%, supporting the Australian dollar and strengthening the AUD/USD pair. Additionally, RBA Governor Michelle Block confirmed that interest rates will remain on hold for the time being.

The Federal Open Market Committee (FOMC) delivered a dramatic 50 basis point interest rate cut, lowering the federal funds rate to a 4.75% to 5.0% range, the Fed's first rate cut in over four years. According to the CME FedWatch tool, the market is pricing in about a 50% chance that the Fed will cut the rate by 75 basis points to a 4.0% to 4.25% range by the end of the year.

Traders are now focused on the final US gross domestic product (GDP) figures (annualized) for the second quarter (Q2), due to be released during the North American session.

Daily Digest Market Trends: Australian dollar rises on central bank policy divergence

• China plans to inject more than 1 trillion yuan in capital into its biggest state-owned banks, which are facing shrinking interest margins, falling profits and mounting bad loans, the first capital injection of such magnitude since the 2008 global financial crisis.
• According to the Reserve Bank of Australia's September 2024 Financial Stability Review, Australia's financial system remains resilient and risks are largely contained. Notable concerns, however, include tensions in China's financial sector and Beijing's limited response to address these issues. Domestically, there has been a small increase in Australian mortgage borrowers falling behind on their repayments, but only around 2% of home-based borrowers are at serious risk of default.
• The Commonwealth Bank of Australia (CBA) expects the RBA will need to revise its consumption forecasts downwards in November. The RBA has already acknowledged that there are downside risks to its current outlook. This potential revision, combined with expectations of further increases in unemployment and adjusted average inflation being in line with the CBA's forecasts, may put the RBA in a position to cut interest rates before the end of the year.
• Federal Reserve Governor Adriana Kugler said on Wednesday that she “strongly supports” the Fed's decision last week to cut interest rates by half a percentage point. She also said that further cuts would be appropriate if inflation continues to ease as expected, according to Bloomberg.
• Australian Treasurer Jim Chalmers is due to visit China this week to strengthen economic ties between the two countries. “Given our vulnerability to fluctuations in the Chinese economy, it is essential that I hold discussions with key Chinese officials in Beijing over the next two days,” Treasurer Chalmers said.
• In a recent note, JPMorgan advised investors to keep an eye on commodity and bond yields, given the market's positive outlook following China's stimulus package on Tuesday. The bank stressed that global economic growth is receiving renewed impetus from China, an element that has been missing in recent years. This development is seen as positive for the market, as it significantly reduces the risk of a recession. However, JPMorgan also warned of the potential risk of reinflation.
• Australia's monthly consumer price index rose 2.7% year-on-year in August, below the previous 3.5% increase and the forecast 2.8% increase.
• People's Bank of China (PBOC) Governor Pan Gongsheng announced on Tuesday that China will cut the reserve requirement ratio (RRR) by 50 basis points (bps). He also said the central bank will cut the seven-day repo rate to 1.5% from 1.7% and reduce down payments on second homes to 15% from 25%. Additionally, the PBOC cut the one-year medium-term lending facility (MLF) rate to 2.0% from 2.30% on Thursday. The last cut was from 2.50% in July 2024.

Technical reasons why: The Australian Dollar remains below the lower boundary of the ascending channel around 0.6850

On Thursday, the AUD/USD pair is trading near 0.6830. Technical analysis on the daily chart shows that the pair has broken below the ascending channel pattern, suggesting a possible weakening of the bullish trend. However, the 14-day Relative Strength Index (RSI) is above the 50 level, indicating that bullish sentiment is still sustained.

As for resistance, the AUD/USD pair might test the lower limit of the ascending channel at the 0.6860 level. A move back into the ascending channel will strengthen the bullish trend and the pair could approach the upper limit of the ascending channel around the 0.6960 level.

On the downside, the AUD/USD pair is likely to find support at the 9-day Exponential Moving Average (EMA) at the 0.6809 level. The next key support is at the psychological level of 0.6700. Below this level, the pair may drop further towards the six-week low at 0.6622.

AUD/USD: Daily Chart