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Australian Dollar holds strong due to monetary policy divergences, eyes on PCE data from the US

  • AUD/USD surges higher amidst positive Australian economic data.
  • Monetary policy divergence continues to favor the Aussie.
  • Focus shifts to US PCE data, which may influence market expectations for Fed rate cuts in November.

The AUD/USD pair surged higher on Thursday, rising by 0.90% to 0.6890. The Australian Dollar strengthened after the release of positive economic data and the hawkish stance of the Reserve Bank of Australia (RBA) this week. Meanwhile, the US Dollar weakened as markets are hopping for a larger cut by the Federal Reserve (Fed) in November.

Amidst a multifaceted economic landscape in Australia, the Reserve Bank of Australia's (RBA) assertive stance on inflation has led markets to anticipate a modest reduction in interest rates by only 0.25% in 2024.

Daily digest market movers: Australian Dollar rises sharply on RBA's rate hold

  • The Aussie advanced significantly against the US Dollar after the RBA kept its interest rates unchanged at 4.35%, but maintained a hawkish message.
  • In fact, RBA Governor Michelle Bullock stated that the bank isn’t considering rate cuts.
  • Market participants anticipate that the Fed may implement another 50 basis point (bps) interest rate cut in November, following its initial 50 bps reduction to 4.75%-5.00% last week.
  • Investors are closely watching the upcoming release of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for August.
  • The core PCE inflation data, which is the Fed's preferred inflation gauge, is expected to increase from 2.6% in July to 2.7%.
  • A sustained increase in inflation could reinforce expectations for the Fed to reduce interest rates by 50 bps in November, while a stronger-than-expected reading may dampen those expectations.

AUD/USD technical outlook: Aussie regains momentum after Wednesday’s decline

After a decline to around 0.6800, the AUD/USD pair gained momentum, rising to near 0.6900. Indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators suggest a steady bullish momentum and the pair may be set to retest the area above 0.6900.

If the Aussie resumens its downside it might retest the 0.6800 area which proved to be a strong support. Below, 0.6750 and 0.6730 line up.

RBA FAQs

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.

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.

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.

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.

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

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

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