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Australian Dollar falls following lower-than-forecast inflation data


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  • Australian Dollar weakens after inflation data comes out below expectations, suggesting the RBA may take a less hawkish stance going forward. 
  • AUD/USD recovers marginally after US New Home Sales regsiter a fall in June.
  • The FOMC meeting later on Wednesday could impact the US Dollar and cause volatility for AUD/USD.  

The Australian Dollar (AUD) weakens against the US Dollar (USD) on Wednesday, after Aussie inflation data surprises to the downside, suggesting a less hawkish stance from the Reserve Bank of Australia (RBA) going forward. The AUD/USD recovers marginally after the release of US New Home Sales shows an unexpected 2.5% drop, indicating that high interest rates in the US may be negatively impacting the housing market. Traders now await the Federal Reserve’s (Fed) July meeting to conclude later on Wednesday and the publication of their statement of monetary policy for further directional cues. 

The AUD/USD pair trades in the 0.67s as the US session gets underway.  

Australian Dollar news and market movers 

  • The Australian Dollar reverses lower against the US Dollar after the release of Australian Consumer Price Index (CPI) data for Q2 shows a steeper-than-expected slowdown in inflation. This suggests the RBA will take a less hawkish stance going forward, with interest rates perhaps coming down sooner than expected. Lower interest rates are negative for currencies as they are not as attractive to foreign investors looking for a place to park their capital. 
  • Australian CPI inflation came out at 6.0% in Q2 YoY when 6.2% had been forecast versus the 7.0% in Q1. 
  • On a QoQ basis, CPI registered a 0.8% rise versus the 1.0% forecast by economists and 1.4% previous. 
  • The Reserve Bank of Australia’s (RBA) preferred gauge, RBA Trimmed Mean CPI, measured quarterly, increased by 5.8% YoY in Q2 versus the 6.0% rise estimated and the 6.6% of Q1.
  • QoQ RBA Trimmed Mean CPI rose 1.0% versus the estimated 1.1% rise, but below the 1.3% rise in Q1. 
  • Inventory data from the American Petroleum Institute (API) showed a rise in stockpiles suggesting lower demand and weighing on Oil, one of Australia’s key exports. This acts as a headwind for the Aussie. 
  • NUS New Homes Sales in June come out at 0.679 million in June, below the 0.725M forecast and the 0.715M previously. The total decline is 2.5% compared to the 6.6% rise in May. The data suggests higher interest rates are dissuading house buyers from taking out mortgages, and if they persist could be a factor for the Fed to consider when assessing how long to keep interest rates high.
  • The Federal Reserve’s (Fed) interest rate decision at 18:00 GMT on Wednesday could impact the AUD/USD pair by way of influencing the US Dollar. 
  • The Fed is already expected to raise interest rates by 0.25%, however, the wording of its accompanying statement may impact the US Dollar. 
  • A more hawkish commentary will come as a surprise as the market is not pricing in further rate hikes from the Fed. As such, it would strengthen the US Dollar and weigh on the AUD/USD pair. 
  • The opposite is true if the Fed indicates it may have reached peak rate or even talks about possibly bringing rates down in 2024. 
  • There exists a high risk that the RBA will have to cut rates from their current 4.1% level in 2024 because the Australian house market is dominated by variable-rate mortgages so it is more sensitive to changes in interest rates, and homeowners have recently been adversely affected by higher mortgage interest repayments, according to Bloomberg Intelligence, as quoted by Financial Review. 
  • The RBA’s Cash Rate is 4.1%, which is below the Fed’s 5.25% (likely to be 5.50% after Wednesday) – overall favoring capital flows to the Greenback versus the Aussie. 
  • China’s pledge to increase support for the economy has helped the Australian Dollar since it is Australia’s largest trading neighbor. 

Australian Dollar technical analysis 

AUD/USD is in a sideways trend on both the long and medium-term charts. The February 2023 high at 0.7158 is a key hurdle on the weekly chart, 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. 

Australian Dollar vs US Dollar: Weekly Chart

A confluence of support made up of all the major daily simple moving averages (50, 100 and 200) exists in the upper 0.66s and early 0.67s. This is expected to provide a rigid cordon of support, acting as a barrier to further losses.

The exchange rate has already bounced off the 200-day Simple Moving Average (SMA) at 0.6725 and completed a pivot higher. If Wednesday continues the bullish price action, that will add confirmation of a reversal of the downmove.  

Australian Dollar vs US Dollar: Daily Chart

Despite the decline witnessed so far on Wednesday, there is potential for a recovery, given the underpinning support from the major MAs. 

A decisive break above the June 16 high at 0.6900 would provide stronger confirmation of a more bullish outlook. 

Likewise, a decisive break below the 50 and 100-day Simple Moving Averages (SMA) would confirm a continuation of the recent bear move lower to a speculative target at the June and July lows in the mid-0.64s. 

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. 

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.