- Australian Dollar reverses and declines as it continues ping-ponging in a range.
- The latest leg down came after the Reserve Bank of Australia decided against raising interest rates, contrary to expectations.
- The RBA said it needs time to assess the impact of previous hikes and new economic data coming in.
- Underwhelming US data released on Tuesday slows the Aussies decline against the US Dollar.
The Australian Dollar (AUD) drops like a stone on Tuesday, after the Reserve Bank of Australia (RBA) decided to keep its key interest rate unchanged at 4.10% at its August meeting, when it had been expected to raise it by 0.25%.
Since higher interest rates tend to strengthen a currency, by attracting more inflows of foreign capital, the decision had the effect of weakening the Australian Dollar, which gave back all its gains from the previous day.
The release of sub-par US data on Tuesday, however, slows the Australian Dollar’s decline against its US namesake. The US ISM Manufacturing PMI for July misses expectations and remains in contraction territory, whilst JOLTS Job Openings for June fall below the expected level.
AUD/USD trades in the 0.66s during the US session.
Australian Dollar news and market movers
- The Australian Dollar undoes Monday’s gains, after the RBA’s decision to keep interest rates unchanged at its August meeting, citing the need to assess the impact of policy tightening to date and the economic outlook.
- That said the bank did not rule out the possibility of further rate hikes in the future saying, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”
- US data misses estimates: ISM Manufacturing PMI for July comes out at 46.4, failing to hit the 46.8 expected but above the 46.0 of June. JOLTS Job Openings in June fall to 9.582 million compared to the 9.620M expected and 9.616M previous figure.
- A possibility that both the RBA and the Federal Reserve have reached peak interest rates could contain AUD/USD within its current range, according to Kit Juckes, Chief Global FX Strategist at Société Générale.“If both RBA and Fed are ‘done’ for this cycle, I can’t really see the recent 0.65-0.69 range breaking any time soon,” says the Strategist.
- The RBA can still hike in September, according to Economists at ING.
- The Aussie has the potential to move down towards its YTD lows at 0.65 if Nonfarm Payrolls come out higher-than-expected on Friday (supporting the USD), according to Economists at TD Securities. “Today’s dovish surprise is likely to send AUD lower, possibly retesting the support of the 0.65 lows in end May,” they added.
- Key data releases for the US Dollar in the week ahead, include US labor market data, with the release of the ADP report on Wednesday, the usual weekly Initial Jobless Claims on Thursday, and the crucial Nonfarm Payrolls on Friday.
- The ISM gauges for the US manufacturing and services sectors will also be under the spotlight, given the data-dependence context highlighted by the Federal Reserve in its last meeting on July 26.
Australian Dollar technical analysis
AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will alter the outlook to one that is more bullish longer term.
Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone from a longer-term perspective.
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Australian Dollar vs US Dollar: Weekly Chart
The confluence of moving averages (MA) close to 0.6700, made up of most of the major SMAs – the 50-week, 50-day and 100-day – remains a key support and resistance level. The exchange rate challenged but failed to break decisively above this level on Monday, finally capitulating after the RBA decision early Tuesday.
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Australian Dollar vs US Dollar: Daily Chart
Price has now dived down again, restesting Friday’s 0.6623 lows. A clean break below these lows would probably see further downside to the June lows not far below at 0.6600.
Last week’s move down may have completed a Measured Move pattern, or three wave ABC correction (see labels on daily chart), where waves A and C are of similar length. The same pattern could form the end of a larger Gartley Pattern, according to FXStreet Premium’s Senior Analyst Ian Coleman. As such there signs of a bearish ‘cycle’ completing with the possibility of a new upcycle starting.
The absence of a reversal higher, however, makes the bullish scenario speculative. It would require a reversal pattern followed by a decisive break above the cordon of MA’s at 0.6700 to reinvigorate short-term bullish hopes.
At the moment the exchange rate has every chance of continuing last week’s bearish tone lower. A break below June’s 0.6600 lows would revive the short-term downtrend and the possibility of a move down to the YTD lows at 0.6460.
The pair is in a sideways trend on the higher time-frame charts, however, so the overall probabilities do not favor one scenario over another – nor is the Relative Strength Index (RSI) providing much insight on either timeframe.
Note: In technical terms, a ‘decisive break’ consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.
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.
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