Australian Dollar sees more red on Chinese economic woes
- AUD/USD registered significant declines on Tuesday towards 0.6615.
- The slowdown in Chinese economic activity is contributing to the decline in commodity prices.
- The stubbornly high inflation continues to prompt the RBA to delay rate cuts.
In Tuesday's trading session, the Australian Dollar (AUD) suffered further losses against the USD, with AUD/USD falling to 0.6615. This decline is largely attributed to sluggish Chinese economic activity which has resulted in a drop in commodity prices, illustrated by plunges in iron ore future prices to their lowest since early April.
Despite signs of weakness in the Australian economy, the RBA continues to resist rate cuts due to stubbornly high inflation. This could potentially limit any further decline in the AUD. The RBA maintains its position as one of the last central banks within the G10 countries likely to start cutting rates, a stance that might extend the AUD's gains.
Daily digest market movers: Aussie down partly due to economic concerns in China, markets await new clues on RBA’s stance
- Chinese economic concerns are weighing heavily on the Australian currency as China remains one of Australia's closest trading partners, and the drop in commodity prices is impacting the AUD.
- The CSI 300 stock index in China dropped dramatically by over 2% overnight, and the absence of specific measures in the recent third plenary session of China's central committee to address the country's structural economic disadvantages further added to these concerns.
- Additionally, the unexpected rate cut by the People's Bank of China (PBoC) earlier this week triggered worries about the health of the Chinese economy.
- However, the hawkish stance of the Reserve Bank of Australia (RBA) could limit the downside for the Aussie.
- The market now predicts around 50% likelihood of the RBA implementing a rate hike either in September or November. Australian Judo PMIs will be closely observed during the Asian trading session.
AUD/USD technical analysis: AUD/USD confirms correction following July's sharp gains.
While the AUD/USD pair has entered a correction phase after the sharp gains of early July, the main concern is that they have now fallen below the 20-day Simple Moving Average (SMA) but as long as the pair stays above the 100 and 200-day SMA, any downward adjustments could be considered 'corrective'. If it falls below these lines, that could be a sell signal. The range to watch for AUD/USD is 0.6630-0.6600, as buyers must maintain their orbit around this area to avoid 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.
