Australian Dollar declines on USD recovery, outlook bright

AUD/USD declines amidst rising risk-off sentiment.
China's PBOC keeps its 1-year MLF rate steady at 2.30%, which failed to trigger movements on the AUD.
The RBA's hawkish stance supports the Australian Dollar.

Patricio Martín FXStreet

The AUD/USD declined by 0.30% to 0.6775 in Monday's session as the Australian Dollar (AUD) edged lower despite hovering around a seven-month high near 0.6800. The decline was primarily attributed to a broad USD recovery and a cautious market sentiment.

Amidst a volatile economic backdrop in Australia, the Reserve Bank of Australia's (RBA) aggressive stance against rising inflation has dampened market expectations regarding multiple cuts, which has benefitted the Aussie.

Daily digest market movers: Australian Dollar declines due to USD strength, lower commodities weigh

AUD/USD multi-day rally faces resistance around 0.6760 due to weak copper prices, despite a recovery in iron ore prices.
AUD's recent strength was driven by a weaker US Dollar and improved risk appetite.
In addition, monetary policy divergence between the RBA and the Federal Reserve (Fed) catalyzed the pair.
On the Chinese front, China's PBOC kept its 1-year MLF rate unchanged at 2.30%, but further stimulus is anticipated as the economy struggles.
July industrial profits in China may provide insights into the persisting weaknesses in the mainland economy.
Any signs of weakness in the Chinese economy might weigh on the Aussie

AUD/USD technical outlook: Bullish momentum eases, support at 0.6750

The AUD/USD pair faced further downside pressure on Monday, as buyers are taking a breather. The Relative Strength Index (RSI) is at 62 with a downward tendency, while the Moving Average Convergence Divergence (MACD) presents decreasing green bars, suggesting a decrease in bullish momentum. Volume has been relatively stable, indicating a lack of significant buying or selling pressure.

Overall, the technical outlook for AUD/USD remains neutral. The RSI is still above its midpoint, and the MACD shows decreasing bullish momentum. Further consolidation or a reversal could be in play.

Immediate support levels can be seen at 0.6750, 0.6700 and 0.6650, while resistance levels may be encountered at 0.6800, 0.6850 and 0.6900.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Author

Patricio Martín

FXStreet

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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