Australian Dollar extends losses on Chinese and Australian economic woes
- AUD/USD marked more losses on Wednesday reaching 0.6580.
- Concerns over China's economic health and commodity prices main cause of AUD's slide.
- Australia reported weak Judo PMIs during the Asian session.
In Wednesday's session, the Australian Dollar (AUD) faced further losses against the USD, with AUD/USD slipping below 0.6600. Worsening concerns over China's economic health, along with falling iron ore prices and weak Australian Judo Bank Flash PMI, were the primary contributors to the AUD's continued downfall.
Despite evident signs of faltering strength in the Australian economy, the Reserve Bank of Australia (RBA) stays firm on delaying rate cuts due to persistently high inflation. This stance could potentially restrict any further weakening of the AUD. The RBA appears set to be one of the last central banks among the G10 countries to implement rate cuts, a stance that may potentially extend further AUD gains.
Daily digest market movers: The Aussie suffers a heavy blow amidst troubling economic signs in China, soft Judo PMIs contributes
- The Australian Dollar has experienced a significant sell-off heavily influenced by China's dismal economic prospects.
- China's Q2 Gross Domestic Product (GDP) fell short of expectations due to weak demand both domestically and overseas
- Worries regarding sluggish GDP growth in the world's second-largest economy deepened following the People’s Bank of China (PBoC)'s unexpected rate-cut decision on Monday and a lack of significant spending measures in the Third Plenum.
- On Wednesday's early Asian trading session, preliminary Judo Bank PMI readings indicated that the Composite PMI dipped to 50.2 from the previous release of 50.7.
- The Manufacturing PMI showed a slight improvement of 47.4, it fell back into contraction while the Service PMI expanded more slowly at 50.8.
AUD/USD technical analysis: AUD/USD expands correction and loses 100-day SMA
The AUD/USD moving below the 20 and 100-day Simple Moving Average (SMA) indicates an area of concern and suggests that the downward movements might not be just a correction. However, as long as the pair retains a position above the 200-day SMA, the downward adjustments could still be considered 'corrective'.
Falling below this line could trigger a sell signal. The range traders should monitor for AUD/USD is 0.6600 - 0.6580 as buyers must maintain this area to prevent further losses.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
