Australian Dollar soft on Chinese outlook, dovish RBA minutes
- AUD/USD declines as Chinese stimulus concerns weigh on market sentiment.
- Risk-perceived currencies are also under pressure due to rising Oil prices and the Israel conflict.
- RBA Meeting Minutes gave some dovish insights on the RBA’s stance.
The AUD/USD declined by 0.60% to 0.6725 in Tuesday's session, influenced by China's uncertain economic outlook. A leading Chinese official failed to go into detail about the size or parameters of the government’s upcoming stimulus measures, which worried investors and sent the Chinese stock market reeling.
Despite the uncertainties surrounding the Australian economy, the Reserve Bank of Australia (RBA) signaled a dovish tone in the release of its latest minutes, which fueled bets of an initial cut in December.
Daily digest market movers: Australian Dollar slips after RBA minutes, China outlook
- Regarding the RBA minutes, during the September 24 meeting, the RBA kept the cash rate target steady at 4.35% and maintained its neutral stance.
- However, the minutes revealed a more dovish tone as the central bank removed the August meeting's statement that "a reduction in the cash rate target was unlikely in the near term."
- Notably, RBA Deputy Governor Hauser dismissed the characterization of the minutes as dovish, emphasizing that the task of reducing inflation is "not finished yet."
- Markets currently place around 50% odds on a 25 bp rate cut by December.
- On the Fed’s side, markets eased on the aggressive dovish bets and provided some relief to the Greenback.
- This week’s Consumer Price Index (CPI) reading will be important.
AUD/USD technical outlook: Aussie pair under bearish momentum, must hold 0.6700
The AUD/USD pair has been trading with a strong downward bias in the last few sessions. The Relative Strength Index (RSI) is in the negative area of the map and is declining sharply. The RSI value of 40 suggests that selling pressure is rising. The MACD is also bearish with the histogram declining and red.
The overall technical outlook is bearish, and the pair might use supports at 0.6700, 0.6650 and 0.6600. On the other hand, it has resistance at 0.6800, 0.6850 and 0.6900.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
