Australian Dollar rises to near 0.7090 ahead of RBA-Fed minutes

The Australian Dollar rebounds against the US Dollar after a two-day correction.
Investors await RBA-Fed minutes and the Australian employment data.
Australian employers are expected to have added 20K fresh jobs in January.

Sagar Dua FXStreet

The AUD/USD pair regains ground after a two-day corrective move and is up 0.2% to near 0.7090 during the European trading session on Monday. The Aussie pair gains as the Australian Dollar (AUD) rebounds, with investors awaiting the release of the Reserve Bank of Australia (RBA) minutes on Tuesday.

In the policy meeting earlier this month, RBA Governor Michele Bullock already clarified that monetary policy path to remain on the upside as long as risks to price pressures remain titled north, after hiking the Official Cash Rate (OCR) by 25 basis points (bps) to 3.85%.

This week, investors will also focus on Australian employment data for January, which will be released on Wednesday. The data is expected to show that the economy created 20K fresh jobs, lower than 65.2K in December. The Unemployment Rate is seen rising to 4.2% from the previous reading of 4.1%.

Meanwhile, the US Dollar (USD) trades calmly in a holiday market mood in the United States (US) due to President’s Day. During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 97.00.

This week, investors will focus on the Federal Open Market Committee (FOMC) minutes of the January policy meeting, which will be released on Wednesday.

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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