- Australian Dollar holds ground above 0.6350 after soft Retail Sales data.
- Australia’s Retail Sales reported a 0.2% print, lower than the expected 0.3%.
- US Dollar continues to strengthen on higher US Treasury yields, coupled with upbeat economic data.
The Australian Dollar (AUD) hit a 10-month low on Wednesday. However, the AUD/USD pair holds ground after the release of disappointing Australia’s Retail Sales data.
Australia’s monthly Consumer Price Index (CPI) has rebounded from July’s reading, which could be attributed to the increasing energy prices. This expected increase in inflation has raised anticipations of another interest rate hike by the Reserve Bank of Australia (RBA). However, the AUD failed to gain traction despite positive Consumer Price Index (CPI) figures.
The Aussie Dollar is under downward pressure due to increased risk aversion sentiment in the market. The drop in commodity prices is also acting as a limiting factor on the upside potential of the AUD/USD pair.
The US Dollar Index (DXY) continues to strengthen, propelled by robust macroeconomic data from the United States (US), trading at its highest levels since December. This surge in the US Dollar (USD) is attributed to the positive performance of US Treasury yields over an impending US government shutdown. The yield on the 10-year US Treasury note has reached record highs.
The bullish momentum in the USD is further reinforced by the hawkish remarks made by Federal Reserve (Fed) board members. Neel Kashkari, the President of the Minneapolis Federal Reserve, recently made comments that suggest the potential for additional rate hikes in the future.
Kashkari also left open the possibility of interest rates remaining at their current levels if rate cuts are delayed even further.
Daily Digest Market Movers: Australian Dollar weakens on market caution, higher US Treasury yields, hot macros
- AUD/USD attempts to rebound after hitting a 10-month low at 0.6331 on Wednesday, trading around 0.6360 at the time of writing during early Asian trading hours on Thursday.
- Australian Retail Sales data showed that consumer spending is reduced to a growth rate of 0.2% from the previous rate of 0.5%. The index was expected to grow at a 0.3% rate in August.
- Australia’s Monthly Consumer Price Index (CPI) year-over-year for August rose 5.2% as expected, up from the previous rate of 4.9%.
- There is a growing expectation for rate increases in the subsequent November and December meetings by the RBA.
- US Dollar’s (USD) strength is attributed to the positive performance of US Treasury yields over an impending US government shutdown. The yield on the 10-year US Treasury note has reached record highs.
- US Durable Goods Orders rose 0.2%, swinging from the previous decline of 5.6% and market expectation of a 0.5% decline in August.
- EIA Crude Oil Stocks Change data, on the week ending September 22, decreased to a reading of -2.17M from -2.135M prior. The report was expected to release a -0.32M figures.
- The situation in China regarding Evergrande continues to worsen, with increasing turmoil, intrigue, and uncertainty. Bloomberg reported on Wednesday that the chairman of the company had been placed under police surveillance.
- Evergrande, the world’s most indebted developer with over $300 billion in total liabilities, is at the heart of an unprecedented liquidity crisis in China’s property sector.
- The hawkish remarks from Neel Kashkari, the President of the Minneapolis Federal Reserve have led to a broad-based strengthening of the US Dollar (USD) and have acted as a headwind for the AUD/USD pair. Kashkari emphasized the potential for additional rate hikes in the future.
- Traders await the US data such as the Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred measure of consumer inflation, which is due on Friday. The annual rate is expected to reduce from 4.2% to 3.9%.
Technical Analysis: Australian Dollar hovers above 0.6350, barrier at 0.6400 psychological level
Australian Dollar trades higher around 0.6380 level during the Asian session on Thursday. AUD/USD pair could find a barrier around 0.6400 psychological level, followed by the 21-day Exponential Moving Average (EMA) at 0.6422. A firm break above the latter could support the Aussie Dollar (AUD) to explore the region around 23.6% Fibonacci retracement at 0.6464. On the downside, the monthly low at 0.6357 aligned with the 0.6350 psychological level could be the key support, following the 0.6300 psychological level.
AUD/USD: Daily Chart
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.