Australian Dollar remains weak as China's situation worries investors
- AUD/USD saw a larger decline on Thursday, to land at 0.6550, reverting to the status of being the worst performing G10 currency.
- Persistent concerns about the Chinese economy's health and the AUD's 'high risk' status continue to add pressure on the AUD.
- Weakening Australian economic outlook might make the RBA reconsider its hawkish stance.
In Thursday's session, the Australian Dollar (AUD) intensified losses against the USD, with AUD/USD falling close to 0.6550 due to multiple headwinds. Continual weakness in China's economy paired with depreciating iron ore prices are major contributors to the AUD's decline.
Despite the Australian economy's sparks of vulnerability, the Reserve Bank of Australia (RBA) remains resistant to rate cuts due to stubbornly high inflation. This stance could potentially hinder further depreciation of the AUD. The RBA is slated to be one of the last central banks among the G10 to implement rate cuts, which may eventually limit the AUD losses.
Daily digest market movers: Aussie’s decline extends, amidst alarming economic indicators in China and Australia
- In a 'risk-off' sentiment, the AUD registered an intense sell-off, primarily influenced by market worries over the Chinese economy and the Aussie's conspicuous position as the 'high risk' G10 currency.
- At the start of the week, the People’s Bank of China (PBoC) decided to cut rates, which sparked fears about the health of the second-largest economy in the world, which happens to be Australia’s biggest trading partner.
- In addition, Industrial metals prices were under pressure due to fears of soft Chinese demand.
- The Reserve Bank of Australia (RBA) remains hawkish and doesn’t show signs of easing on its stance and markets bet on a hike in Q4.
AUD/USD technical analysis: Bearish outlook is strengthened with the pair now below mains SMAs
The AUD/USD moving below 20, 100, and 200-day Simple Moving Average (SMA) represents a more severe area of concern, suggesting that the downward trends may go further.
The AUD/USD is undergoing a significant nine-day losing streak, losing almost 3.50% in July and indicators are drastically negative, but their oversold nature with the Relative Strength Index (RSI) near 30 might prompt a corrective response.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
