- AUD/USD sees slight decline as markets gear up for the Reserve Bank of Australia's upcoming rate decision.
- US Treasury yields rise, boosting the Dollar, as anticipation builds for the Federal Reserve's policy announcement.
- The RBA is expected to hold rates unchanged amid mixed opinions among economists on the central bank's first rate cut.
The Australian Dollar begins the Asian session, clocking minuscule losses of 0.02% against the US Dollar as market participants prepare for the Reserve Bank of Australia (RBA) monetary policy decision. On Monday, the AUD/USD was virtually flat, though at the time of writing, it trades at 0.6559, down 0.01%.
Upbeat sentiment could shift amidst major central bank decisions
Wall Street finished Monday’s session in the green. US Treasury yields edged higher as investors await the Federal Reserve’s monetary policy decision, with the 10-year note benchmark up at 4.328%. Consequently, the Greenback advances 0.13%, as measured by the US Dollar Index (DXY) at 103.58.
On Monday, the US economic docket was light, with the release of the National Association of Home Builders (NAHB) Market Index for February, which improved the most since July 2023, rising by 51, up from 48 in February. The NAHG Chairman Carl Harris noted “Buyer demand remains brisk and we expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year.”
Aside from this, the day's main theme is the RBA’s decision. Market players estimate the central bank would keep rates unchanged thought, there are different opinions amongst economists. Some expect the RBA will lower rates in November, while others estimate the first cut will be in September.
Given the backdrop of the Aussie economy printing mixed figures on inflation, and growth slowed to 1.5% in Q4 2023 from 2.1%, that has opened the door for easing policy. Testifying before the Australian Parliament last month, Bullock said that “inflation is being persistent, particularly in services. But it is coming down.”
ANZ Bank analysts estimate the RBA would keep a “mild tightening bias, with no change in rates. While the January labor force survey came in weak, we think the RBA (like us) is expecting payback in the February data.”
AUD/USD Price Analysis: Technical outlook
If the RBA surprises the markets with a dovish tilt, the AUD/USD can drop further below the 200-day moving average (DMA at 0.6557, exposing the 0.6500 mark. Further losses are seen at the March 5 low of 0.6477, followed by the February 13 swing low of 0.6442. On the other hand, the pair could aim higher if the RBA sticks to a hawkish message and might recoup the 0.6600 mark. The next resistance level is seen at January’s 5 cycle low, which turned resistance at 0.6640.
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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