Australian Dollar drifts lower as Trump tariff concerns linger
- The Australian Dollar edges lower in Tuesday’s Asian session.
- Renewed USD demand and Trump’s tariff threats weigh on the pair; hawkish expectations of the RBA might limit its downside.
- Investors brace for the US October JOLTs Job Openings and Fedspeak on Tuesday.
The Australian Dollar (AUD) extends its downside to near 0.6470 during the early Asian session on Tuesday. The stronger US Dollar (USD) to the three-day highs drags the pair lower. Additionally, the eruption of a global trade war under returning US President-elect Donald Trump could exert some selling pressure on the Aussie.
Nonetheless, the hawkish comments by Reserve Bank of Australia (RBA) Governor Michele Bullock might help limit the AUD’s losses. The RBA Governor Bullock said last week that the core inflation remains too high to consider near-term interest rate cuts, which increased the demand for the AUD. Later on Tuesday, the US JOLTs Job Openings for October will be published. Also, the Federal Reserve’s (Fed) Adriana Kugler and Austan Goolsbee are set to speak. The Australian Gross Domestic Product (GDP) for the third quarter (Q3) will be closely watched on Wednesday.
Australian Dollar weakens amid Trump’s tariff threats
- Australia’s current account deficit came in higher than expected in the third quarter, arriving at a deficit of A$14.1 billion from A$16.4 billion shortfall in Q2 (revised from A$-10.7 billion). This figure was above forecasts of an A$10.0 billion shortfall.
- Australia’s Retail Sales climbed by 0.6% MoM in October, compared to a rise of 0.1% in September, according to the Australian Bureau of Statistics (ABS) on Monday. The reading was above the estimations of a 0.3% growth.
- The US ISM Manufacturing PMI rose to 48.4 in November versus 46.5 prior. This reading came in stronger than the market expectation of 47.5.
- Atlanta Fed President Raphael Bostic said on Monday that he’s undecided on whether a rate cut is needed in the December meeting but still believes Fed officials should continue lowering rates over the coming months, per Bloomberg.
- New York Fed President John Williams stated on Monday that the Fed officials will likely need to cut the interest rates further to move policy to a neutral stance now that risks to inflation and employment have become more balanced.
- Fed Governor Christopher Waller noted that he was leaning toward supporting an interest rate cut at the December meeting amid expectations for inflation to continue to ease toward the Fed’s 2% target.
Technical Analysis: Australian Dollar’s bearish trend continues
The Australian Dollar weakens on the day. The AUD/USD pair remains in a downtrend on the daily chart, characterized by the price holding below the key 100-day Exponential Moving Average (EMA). Additionally, the 14-day Relative Strength Index (RSI) stands below the 50-midline, supporting the sellers in the near term.
Bearish candlesticks below 0.6434, the low of November 26, may attract Aussie bears and drag AUD/USD to the lower limit of the descending trend channel of 0.6330. Extended losses could see a drop to 0.6285, the low of October 3, 2023.
On the other hand, sustained trading above the upper boundary of the trend channel of 0.6530 could set the pair to 0.6626, the 100-day EMA. Bullish candlesticks above this level could pave the way to 0.6687, the high of November 7.
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.