Australian Dollar recovers as the USD retraces
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Patricio Martín
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30 Oct @ 08:30 (GMT+0)

Australian Dollar recovers as the USD retraces

  • AUD/USD rebounds from multi-week lows amid USD weakness.
  • A break above the 200-day SMA at 0.6630 could signal a more positive outlook for the pair.
  • The RBA's cautious tone and persistent inflation risks suggest that interest rates may stay steady for the foreseeable future.
  • The upcoming US NFP report could weigh on the US Dollar and provide support for AUD/USD.

The AUD/USD rebounded from multi-week lows on Wednesday, driven by broad-based US Dollar weakness. The pair rose by 0.25% to 0.6575, snapping a three-day losing streak.

On the US data front, September’s ADP Employment Report exceeded market expectations in October, but a downward revision in third-quarter GDP growth made the USD tumble. On the other hand, Australia’s Q3 inflation figures cooled but still remain elevated.

Daily digest market movers: Australian Dollar rises on US economic data weakness, USD consolidation

  • AUD/USD rose on Wednesday, boosted by mixed US economic data, which limited the USD gains.
  • The pair climbed to 0.6600, targeting the 200-day SMA at 0.6627, a break above which would signal a shift to a more constructive outlook.
  • Recent data from Australia showed inflation cooling to 2.8% in Q3 from 3.8% in Q2, falling just below the expected 2.9%.
  • The core inflation gauge remains elevated at 3.5% YoY in Q3, giving the RBA no immediate impetus to lower interest rates.
  • US ADP Employment showed a 233K increase on private-sector payrolls in October, beating expectations of a 115K increase.
  • US Q3 Gross Domestic Product grew at a 2.8% pace, stronger than global peers but below market expectations.
  • For next week’s Federal Open Market Committee (FOMC) meetings, markets have already priced in a 25 bps cut.

AUD/USD technical outlook: Pair in consolidation mode, but the outlook is bearish

The daily Relative Strength Index (RSI) is currently at 34, which is in the near oversold area. The RSI is suggesting that buying pressure is recovering since it is rising sharply as selling might have become over-extended. The Moving Average Convergence Divergence (MACD) is red and flat, which gives more evidence of a consolidation starting.

Technical analysis indicates a bearish outlook for AUD/USD, with the RSI below 30 and the MACD histogram in the red. Support levels are located at 0.6550, 0.6530 and 0.6500, while resistance lies at 0.6680, 0.6700 and 0.6750. However, oversold conditions may provide respite, while the pair is closely watched ahead of key US data releases that could impact the trajectory of both currencies.

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.