- The Australian Dollar losses steam after failing to hold gains above 0.6900.
- Geopolitical tensions between Israel and Iran spur safe-haven demand for the US Dollar.
- US unemployment claims rising above estimates, and strong ISM Services PMI data reduces chances of further aggressive Fed rate cuts.
The Australian Dollar (AUD) loses more than 0.50% against the US Dollar on Thursday, dropping after hitting a daily high of 0.6888 amid concerns that the Israel-Iran war could broaden in the Middle East. This spurred flows toward the Greenback, which briefly topped 102.00 via the US Dollar Index (DXY), but mixed US data capped its gains. The AUD/USD trades at 0.6844.
A risk-off impulse is weighing on the Aussie Dollar. Discussions between the US and Israel continued on how to retaliate against Iran. A headline that US President Joe Biden discussed with Israel a possible attack on Iran’s oil facilities dented appetite for riskier assets like the AUD.
Data revealed by the US Department of Labor showed that the number of people filing for unemployment benefits increased above estimates. Meanwhile, business activity data in the services sectors, revealed by the Institute for Supply Management (ISM) exceeded estimates in September, portraying a robust economy, which could erase the chances for a further 50 basis points (bps) of rate cuts by the Federal Reserve (Fed).
In the meantime, the Balance of Trade in Australia printed a surplus in August, which exceeded estimates of A$5.5 billion, came at A$5.64 billion, up from July’s A$5.636 billion.
Besides that, Australia’s Judo Bank Services Purchasing Managers Index (PMI) decelerates from 52.5 to 50.5 in September. This could refrain the Reserve Bank of Australia (RBA) from adopting a hawkish stance amid concerns that the economy is cooling.
Ahead in the calendar, the Australian economic docket will feature Home Loans and Investment Lending for Homes in August.
Daily digest market movers: Australian Dollar tumbles on risk aversion ahead of US NFP
- US Initial Jobless Claims for the week ending September 28 increased from 219K to 225K, surpassing the estimate of 220K.
- The ISM Services PMI for September expanded from 51.5 to 54.9, while Factory Orders for August declined by -0.2%, missing the 0% estimate and down from the previous month’s 4.9% increase.
- US Nonfarm Payrolls, due on Friday, are expected to show 140K jobs added in September, slightly below the 142K jobs in August, with the Unemployment Rate projected to remain unchanged.
- Market participants have placed the odds of a 25 bps rate cut at 66.7%, while the chances of a larger 50 bps cut have decreased to 33.3%, according to the CME FedWatch Tool.
- China’s business activity has deteriorated, which has led to increased stimulus from the People’s Bank of China (PBoC) and the Politburo.
- To stimulate the economy, the PBoC cut loan rates, reduced bank reserve capital requirements and even lowered property down payments. If China’s economy continues to print deflationary readings, it could miss its Gross Domestic Product (GDP) 5% goal for 2024.
Technical outlook: Australian Dollar extends its losses below 0.6850
The AUD/USD remains upwardly biased, but in the short-term the Aussie could test lower prices. The ongoing pullback broke the first support level at 0.6871, exacerbating a drop toward the 0.6800 figure.
From a momentum standpoint, the Relative Strength Index (RSI) is mixed, remaining in bullish territory. However, the RSI is falling almost vertically toward its neutral line. Hence, further AUD/USD downside is seen.
Once AUD/USD cleared the October 1, 2024 low of 0.6856, that has opened the door to challenge the 0.6800 figure. Once surpassed, the next stop would be the 50-day Simple Moving Average (SMA) at 0.6707.
Conversely, if AUD/USD aims higher and closes above 0.6900, look for a retest of the year-to-date high of 0.6934.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting 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) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Read the full article here
