The Australian Dollar (AUD) declines against the US Dollar (USD) on Wednesday, extending its losses for the fifth consecutive day. However, the downside of the AUD/USD pair could be restrained as the Aussie Dollar could find support as markets grow increasingly wary of a Reserve Bank of Australia (RBA) rate hike as early as February.
Commonwealth Bank of Australia and National Australia Bank now expect the RBA to start tightening sooner than previously projected, pointing to stubborn inflation in a capacity-constrained economy. Their forecasts followed the central bank’s hawkish hold on rates at its final 2025 meeting last week. Swaps price in a 28% chance of a February hike, nearly 41% in March, with August almost fully priced.
The AUD remains under pressure as Australia’s preliminary S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6 previously, according to data released by S&P Global on Tuesday. Meanwhile, the Services PMI slipped to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6.
US Dollar struggles despite diminishing Fed rate cut bets
- The US Dollar Index (DXY), which measures the value of the US Dollar against six major currencies, is holding ground and trading around 98.20 at the time of writing. The USD could find support as mixed labor market data did little to reinforce expectations of additional Federal Reserve rate cuts.
- The US November jobs report showed payroll growth of 64K, slightly above forecasts, but October figures were revised sharply lower and the unemployment rate rose to 4.6%, the highest since 2021, underscoring a gradually cooling labor market. Retail sales were flat on the month, reinforcing signs that consumer demand is losing momentum.
- Fed officials are split over whether more easing of monetary policy is needed next year. The median Fed official penciled in just one reduction in 2026, but some policymakers see no further cuts. Meanwhile, traders anticipate two rate cuts next year.
- The CME FedWatch tool suggests that Fed funds futures are pricing an implied 74.4% chance of a hold in rates at the US central bank’s next meeting in January, up from nearly 70% a week ago.
- The National Bureau of Statistics (NBS) showed Monday that China’s Retail Sales rose 1.3% year-over-year (YoY) in November vs. 2.9% expected and 2.9% in October. Chinese Industrial Production increased 4.8% YoY in the same period, compared to the 5.0% forecast and 4.9% seen previously.
- China’s Fixed Asset Investment came in at -2.6% year-to-date (YTD) YoY in November, missing the expected -2.3% figure. The October reading was -1.7%.
- The Australian Bureau of Statistics (ABS) reported last week that the Unemployment Rate steadied at 4.3% in November. The figure came in below the market consensus of 4.4%. Furthermore, the Australian Employment Change arrived at -21.3K in November from 41.1K in October (revised from 42.2K), compared with the consensus forecast of 20K.
Australian Dollar hovers around nine-day EMA near lower ascending channel boundary
The AUD/USD pair is trading around 0.6630 on Wednesday. The technical analysis of the daily chart shows the pair trading within an ascending channel trend, reflecting a bullish bias. However, the pair is hovering around the nine-day Exponential Moving Average (EMA), indicating a neutral short-term price momentum.
The AUD/USD pair could test the lower boundary of the ascending channel around 0.6620. A break below the channel could put downward pressure on the pair to navigate the region around the six-month low of 0.6414, recorded on August 21.
On the upside, the AUD/USD pair may target the three-month high of 0.6685, followed by 0.6707, the highest since October 2024. Further advances would support the pair to test the upper ascending channel boundary around 0.6740.
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.