Australian Dollar rises on hawkish RBA and rising metals prices

AUD/USD attempts to recover the 100-day SMA at 0.6700.
RBA’s reluctance to embrace cuts benefits the AUD.
Copper and iron ore prices rebound, supporting Australian Dollar.

Patricio Martín FXStreet

The AUD/USD rose by 0.35% to 0.6685 on Tuesday, recovering sharply from 0.6650 amid hawkish signals from the Reserve Bank of Australia (RBA) and hopes for economic stimulus. Markets seem to be considering the possibility of no cuts by the RBA this year. Copper and iron ore prices rebounded as well, providing support to the Australian Dollar.

The RBA is on track to becoming the last central bank of the G10 countries to start cutting interest rates. In the meantime, the bank’s officials haven’t offered clues about when they might consider a rate cut.

Daily digest market movers: Australian Dollar rises sharply as RBA signals less likelihood of rate cut

AUD/USD rallied Tuesday despite USD's gains, buoyed by hopes for China's stimulus and a hawkish RBA.
Lately, RBA Deputy Governor Hauser cautioned against excessive RBA easing, citing elevated inflation.
He warned that he preferred to maintain a data-dependent approach and offered no clues of even being open to cutting.
As for now, the money market has only 50% odds of a 25 bps cut in 2024.

AUD/USD technical outlook: Buyers step in, capped by 100-day SMA

The Relative Strength Index (RSI) has recovered from a low of 39 into the negative area, indicating that buying pressure is recovering for the Aussie. However, the Moving Average Convergence Divergence (MACD) histogram is red and decreasing, suggesting that selling pressure is still present while declining. The overall outlook is mixed with the RSI suggesting a recovery in buying pressure and the MACD suggesting a decline in selling pressure.

Support levels are seen around 0.6680, 0.6650 and 0.6630, while resistance levels are located near 0.6700 (100-day SMA), 0.6730 and 0.6750. Traders should watch for a break of these levels to determine the direction of the next trend.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

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.

How does inflation data impact the value of the Australian Dollar?

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.

How does economic data influence the value of the Australian 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.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

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.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

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.

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