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Australian Dollar rises above the psychological level on anticipation of Fed rate cuts

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  • Australian Dollar sustains a bullish sentiment on the dovish outlook from the Fed.
  • Australian Trade Minister Don Farrell conveyed confidence that China will eliminate punitive tariffs on Australian wine.
  • PBoC is scheduled to announce its Interest Rate Decision on Wednesday.
  • Fed members’ comments on interest rate cut weigh on US Dollar.

The Australian Dollar (AUD) continues its winning streak that began on Wednesday. The AUD/USD pair received upward support in anticipation of rate cuts by the Federal Reserve (Fed), which weighs on the US Dollar (USD).

Australia’s economy showcases resilience, buoyed by strong employment outcomes and increasing incomes, as data released last week indicates. Additionally, the enhanced Purchasing Managers Index (PMI) data for December has bolstered the Australian Dollar.

Traders are expected to observe the Meeting Minutes from the Reserve Bank of Australia (RBA) set to be released on Tuesday, alongside Building Permits and Housing Starts data from Australia. Furthermore, on Wednesday, the People’s Bank of China (PBoC) is scheduled to announce its Interest Rate Decision, adding to the key events influencing the Aussie Dollar.

Australian Trade Minister Don Farrell expressed confidence on Sky News TV that China will remove punitive tariffs on Australian wine. Notably, China has already lifted trade restrictions on the majority of Australian exports that had been previously imposed, indicating a gradual improvement in relations between the two countries.

The US Dollar Index (DXY) grapples to maintain its position after rebounding from a four-month low at 101.77 marked on Thursday. The DXY received support from the improved short-term yield on the US Treasury bond. The 2-year US bond yield improved to 4.48% on Friday.

Additionally, the moderate preliminary Purchasing Managers Index (PMI) for December contributed support for the USD. S&P Global Services PMI rose to 51.3 from 50.8 prior. While Manufacturing PMI declined to 48.2 from 49.4. Investors will focus on Consumer Confidence and Existing Home Sales Change on Wednesday.

However, the Greenback encounters challenges stemming from a weakened sentiment, primarily influenced by the Federal Open Market Committee’s (FOMC) dovish statement. Additionally, dovish remarks from various Fed members exert pressure on the Greenback.

Atlanta Fed President Raphael Bostic, on Friday, anticipated a potential interest rate cut in the third quarter of 2024 if inflation follows the expected trajectory. Furthermore, Chicago Fed President Austan Goolsbee did not rule out the possibility of a rate cut at the Fed’s meeting next March.

Daily Digest Market Movers: Australian Dollar seems hawkish as economy shows resilience

  • The preliminary Judo Bank Composite PMI improved to 47.4 from the previous reading 46.2. The Manufacturing PMI for the same period registered 47.8, a slight increase from the prior figure of 47.7. Additionally, the Services PMI grew to 47.6 compared to the previous reading of 46.0.
  • Australia’s Consumer Inflation Expectations for December eased at 4.5% against the previous figures of 4.9%.
  • The seasonally adjusted Aussie Employment Change (Nov) improved substantially to 61.5K compared to the expected 11.0K. Unemployment Rate rose to 3.9% from 3.7% previously.
  • The People’s Bank of China (PBoC) kept its 1-year Medium-term Lending Facility (MLF) rate unchanged at 2.5%. Additionally, PBoC injected 1.45 trillion Yuan to bolster bank liquidity as 650 billion Yuan worth of MLF loans were matured.
  • The National Bureau of Statistics of China revealed that Industrial Production (YoY) improved to 6.6% in November from 4.6% prior, exceeding the market expectation of 5.6%. However, China Retail Sales (YoY) rose to 10.1% from 7.6% prior, falling short of the market consensus of a 12.5% rise.
  • Federal Reserve (Fed) maintained interest rates at 5.5% in its December policy meeting as expected. Markets are now projecting three rate cuts for 2024.
  • US Retail Sales (MoM) rose 0.3% in November, compared to the expected decline of 0.1%. Initial Jobless Claims for the week ending on December 8 came in at 202K against the 220K expected.

Technical Analysis: Australian Dollar hovers around the 0.6700 post testing recent high

The Australian Dollar hovers around 0.6700 on Monday, having recently tested a five-month high at 0.6728 on Friday. A prevailing bullish sentiment could propel the AUD/USD pair to surpass the recent high and approach the pivotal barrier at 0.6750. On the downside, noteworthy support lies at 0.6650, followed by the 23.6% Fibonacci retracement at 0.6619, and subsequently reaching the psychological support at 0.6600, aligned with the 21-day Exponential Moving Average (EMA) at 0.6597.

AUD/USD: Daily Chart

Australian Dollar price today

The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the strongest against the US Dollar.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   -0.14% -0.17% -0.03% -0.22% -0.06% -0.45% -0.11%
EUR 0.14%   -0.02% 0.12% -0.08% 0.08% -0.31% 0.03%
GBP 0.17% 0.03%   0.13% -0.06% 0.08% -0.28% 0.06%
CAD 0.03% -0.12% -0.16%   -0.22% -0.04% -0.45% -0.09%
AUD 0.22% 0.08% 0.06% 0.20%   0.16% -0.23% 0.11%
JPY 0.07% -0.08% -0.09% 0.05% -0.14%   -0.38% -0.03%
NZD 0.45% 0.31% 0.28% 0.43% 0.23% 0.39%   0.34%
CHF 0.11% -0.03% -0.05% 0.09% -0.11% 0.02% -0.34%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

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.

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