- The RBA's policy outlook has seen the Australian dollar strengthen against the US dollar.
- The RBA is expected to keep interest rates unchanged at 4.35%.
- US S&P Global PMI data showed mixed results during the European session.
On Monday, the AUD/USD pair rose 0.40% to $0.6835 by the close of trading on the 10th US time. The pair was mainly driven by the Reserve Bank of Australia's (RBA) hawkish policy outlook and the release of the US's September S&P Global PMI flash reading.
Uncertainty over the future of the Australian economy and the RBA's continued cautious stance in response to persistent inflation have led financial markets to expect a small interest rate cut of 25 basis points in 2024.
Daily Digest Market Trends: AUD rises on RBA policy outlook, US Dollar recovers
- The Australian dollar rose slightly ahead of the RBA policy meeting as investors expect the policy rate to remain unchanged at 4.35%.
- With inflationary pressures persisting and the labour market strengthening, the RBA's forward guidance on interest rates beyond this year will be heavily scrutinised.
- Meanwhile, the US dollar recovered slightly, supported by skepticism about the Federal Reserve's aggressive interest rate cuts.
- According to CME FedWatch data, the combined rate cuts for November and December are 75 bps, with a 50% chance of a 50 bps cut in November.
- More than 100 economists surveyed by Reuters expect a 25 basis point cut in interest rates at the Fed's two remaining meetings.
- On the data front, the composite S&P PMI fell to 54.4 in September from 54.6 in August, expanding at a modest pace.
- The manufacturing PMI unexpectedly fell to 47.0, while the services PMI expanded to 55.4, better than expected.
AUD/USD technical outlook: Bulls surge ahead, giving further upside potential
AUD/USD may have room to move higher as the pair has risen above 0.6800 and indicators are showing strength. The Relative Strength Index (RSI) is at 64, meaning it is not yet in the overbought zone, and the Moving Average Convergence Divergence (MACD) indicator is showing rising green bars. The next target is around 0.6850.
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 of 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 in 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 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) to buy assets (usually government or corporate bonds) from financial institutions, providing them with much-needed liquidity. QE typically results in a weakening of 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 further assets and stops reinvesting principal on maturing bonds it already holds. This will be positive (or bullish) for the Australian dollar.
