AUD/USD flat lines around 0.6835 area, below YTD peak touched this Tuesday

AUD/USD pulls back after touching a fresh YTD peak, albeit the downside remains limited.
The divergent RBA-Fed policy expectations act as a tailwind amid the upbeat market mood.
China announces a range of stimulus measures and also underpins the China-proxy Aussie.

Haresh Menghani FXStreet

The AUD/USD pair struggles to capitalize on its modest intraday gains to the 0.6870 region, or a fresh YTD peak touched earlier this Tuesday and touches a daily low during the first half of the European session. Spot prices, however, rebounded a few pips in the last hour and currently trade around the 0.6835 region, nearly unchanged for the day.

The intraday pullback lacks any obvious fundamental catalyst and could be attributed to some profit-taking, especially after the recent rally of over 250 pips from the monthly low, around the 0.6620 region. Any meaningful corrective fall still seems elusive in the wake of the divergent Reserve Bank of Australia (RBA)-the US Federal Reserve (Fed) policy expectations.

The Australian central bank, as was widely expected, decided to stand pat for the seventh straight meeting and reiterated that policy will need to be restrictive until confidence returns that inflation is moving sustainably towards the target range. Adding to this, RBA Governor Michele Bullock stated that the recent data has not significantly influenced the policy outlook.

Furthermore, China announced a broad range of stimulus measures on Tuesday to support the faltering economy, which, along with renewed US Dollar (USD) selling, should act as a tailwind for the AUD/USD pair. In fact, the People's Bank of China (PBOC) lowered the Reserve Requirement Ratio (RRR) by 50 bps, freeing up about 1 trillion yuan for new lending.

Meanwhile, expectations for more aggressive policy easing by the Federal Reserve (Fed), along with the underlying strong bullish tone across the global equity markets, keep a lid on the recent US Dollar (USD) recovery from the YTD low. This should further contribute to limiting losses for the AUD/USD pair, instead support prospects for further near-term gains.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

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.

How does inflation data impact the value of the Australian Dollar?

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.

How does economic data influence the value of the Australian 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.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

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.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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