- Australian Dollar reverses and declines as it continues ping-ponging up and down in a range.
- The latest leg down came after the Reserve Bank of Australia decided against raising interest rates, contrary to expectations.
- The RBA said it needs time to assess the impact of previous hikes and new economic data coming in.
The Australian Dollar (AUD) drops like a stone on Tuesday, after the Reserve Bank of Australia (RBA) decided to keep its key interest rate unchanged at 4.10% at its August meeting, when it had been expected to raise it by 0.25%.
The bank gave as its reasons, the need for “further time to assess the impact of the increase in interest rates to date and the economic outlook.” Since higher interest rates tend to strengthen a currency, by attracting more inflows of foreign capital, the decision had the effect of weakening the Australian Dollar, which gave back all its gains from the previous day.
AUD/USD trades in the 0.66s at the start of the US session.
Australian Dollar news and market movers
- The Australian Dollar undoes Monday’s gains, after the RBA’s decision to keep interest rates unchanged at its August meeting, citing the need to assess the impact of policy tightening to date and the economic outlook.
- That said the bank did not rule out the possibility of further rate hikes in the future saying, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”
- A possibility that both the RBA and the Federal Reserve have reached peak interest rates could contain AUD/USD within its current range, according to Kit Juckes, Chief Global FX Strategist at Société Générale.“If both RBA and Fed are ‘done’ for this cycle, I can’t really see the recent 0.65-0.69 range breaking any time soo,” says the Strategist.
- The RBA can still hike in September, according to Economists at ING.
- The Aussie has the potential to move down towards its YTD lows at 0.65 if Nonfarm Payrolls come out higher-than-expected on Friday (supporting the USD), according to Economists at TD Securities. “Today’s dovish surprise is likely to send AUD lower, possibly retesting the support of the 0.65 lows in end May,” they added.
- Key data releases for the US Dollar in the week ahead, include US labor market data, with the release of the ADP report on Wednesday, the usual weekly Initial Jobless Claims on Thursday, and the crucial Nonfarm Payrolls on Friday.
- The ISM gauges for the US manufacturing and services sectors will also be under the spotlight, given the data-dependence context highlighted by the Federal Reserve in its last meeting on July 26.
Australian Dollar technical analysis
AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will alter the outlook to one that is more bullish longer term.
Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone from a longer-term perspective.
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Australian Dollar vs US Dollar: Weekly Chart
The confluence of moving averages (MA) close to 0.6700, made up of most of the major SMAs – the 50-week, 50-day and 100-day – remains a key support and resistance level. The exchange rate challenged but failed to break decisively above this level on Monday, finally capitulating after the RBA decision early Tuesday.
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Australian Dollar vs US Dollar: Daily Chart
Price has now dived down again, restesting Friday’s 0.6623 lows. A clean break below these lows would probably see further downside to the June lows not far below at 0.6600.
Last week’s move down may have completed a Measured Move pattern, or three wave ABC correction (see labels on daily chart), where waves A and C are of similar length. The same pattern could form the end of a larger Gartley Pattern, according to FXStreet Premium’s Senior Analyst Ian Coleman. As such there signs of a bearish ‘cycle’ completing with the possibility of a new upcycle starting.
The absence of a reversal higher, however, makes the bullish scenario speculative. It would require a reversal pattern followed by a decisive break above the cordon of MA’s at 0.6700 to reinvigorate short-term bullish hopes.
At the moment the exchange rate has every chance of continuing last week’s bearish tone lower. A break below June’s 0.6600 lows would revive the short-term downtrend and the possibility of a move down to the YTD lows at 0.6460.
The pair is in a sideways trend on the higher time-frame charts, however, so the overall probabilities do not favor one scenario over another – nor is the Relative Strength Index (RSI) providing much insight on either timeframe.
Note: In technical terms, a ‘decisive break’ consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.