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17 Sep 2024
Australian Dollar firms up in Tuesday's session
- AUD/USD regains ground ahead of FOMC, while the USD consolidates losses.
- Chinese data concerns weigh on the AUD.
- Hawkish RBA keeps the Aussie afloat on Tuesday.
The AUD/USD has regained ground in Tuesday's session and has attracted some follow-through buyers, climbing to a nearly two-week high of 0.6755. The Australian Dollar is feeling the effect of consolidating losses by the US Dollar, as well as concerns about economic data coming from China. Furthermore, a positive risk tone has undermined the USD, adding to the AUD/USD's gains.
Due to conflicting economic signals and the Reserve Bank of Australia's (RBA) strict stance on inflation, the market's expectations for interest rate cuts have been scaled back. Market watchers now anticipate only a modest 25-basis-point reduction in 2024, reflecting a more cautious outlook on the Australian economy.
On Tuesday, the US released Retail Sales data from August that didn’t impact the USD but did surpass expectations as the focus is set on Wednesday’s Fed decision.
Daily digest market movers: Australian Dollar steady ahead of Fed
- US Dollar consolidates recent losses on bets for a 50 bps rate cut by the Fed.
- RBA’s hawkish outlook supports the risk-sensitive Australian Dollar.
- Fundamental backdrop favors the AUD, but concerns about China's economic slowdown could act as a headwind.
- Soft Retail Sales data from the US had little market reaction though US data may be limited as focus remains on Fed interest rate decision come Wednesday.
- Fed is expected to cut interest rates by 25 bps, according to analysts, but a 50 bps cut remains more likely, according to CME FedWatch Tool.
- A smaller-than-expected rate cut could boost the US Dollar and weigh on the AUD.
- A dovish Fed stance could benefit the AUD, while a hawkish stance could bolster the USD.
AUD/USD technical outlook: Pair extends gains on US Dollar weakness
The AUD/USD pair extended gains for the second consecutive day, marking a week-long uptrend. Early during the European session, the Ausie reached its highest point in a week, hovering above the mid-0.6700s.
Indicators are promising, and if the pair holds above the 20-day Simple Moving Average (SMA), the outlook will turn positive.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.