Australian Dollar drifts lower as weak GDP sparks RBA rate cut bets
- The Australian Dollar softens in Thursday’s Asian session.
- Slower-than-expected Australian Q3 GDP and heightened expectations of RBA’s dovish stance exert some selling pressure on the Aussie.
- The US weekly Initial Jobless Claims and Goods Trade Balance are due later on Thursday.
The Australian Dollar (AUD) remains under selling pressure on Thursday. The disappointing Australian economic data and rising expectations for an early interest rate cut by the Reserve Bank of Australia (RBA) drag the Aussie lower. Additionally, the concerns about potential tariffs on imports from President-elect Donald Trump might contribute to the AUD’s downside.
Traders will monitor the US weekly Initial Jobless Claims and Goods Trade Balance on Thursday for fresh impetus. Any signs of softer US labour market data could weaken the Greenback and help limit the pair’s losses. On Friday, all eyes will be on the US Nonfarm Payrolls (NFP) report for November.
Australian Dollar retains negative bias amid downbeat data, RBA dovish expectations
- Australia’s trade surplus increased to 5,953M MoM in October from 4,532M (revised from 4,609M) in September, better than the 4,500M forecasts.
- Australia’s Gross Domestic Product (GDP) grew 0.3% QoQ in the third quarter (Q3), compared with the 0.2% growth in Q2. This reading was below the market consensus of 0.4%.
- The final reading of Australia’s Judo Bank Services PMI improved to 50.5 in November from 49.6 in October, beating the estimation of 49.6.
- The US ISM Services PMI fell to 52.1 in November from 56.0 in October. This reading came in weaker than the expectation of 55.5.
- The US S&P Global Composite PMI declined to 54.9 in November versus 55.3 prior. Meanwhile, the Services PMI dropped to 56.1 in November from 57.0 in the previous reading. Both figures came in weaker than the estimations.
- The Fed Chair Jerome Powell said on Wednesday that the US economy is stronger now than the US central bank had expected in September when it began reducing interest rates, allowing Fed officials to potentially slow the pace of interest rate cuts ahead.
- San Francisco Fed President Mary Daly noted on Wednesday that the US central bank does not need to be urgent on rate cuts, adding that the Fed has more work ahead to achieve 2% inflation and lasting growth.
AUD/USD’s bearish momentum on the daily chart remains intact
The Australian Dollar trades on a softer note on the day. The negative outlook of the AUD/USD pair remains in play, characterized by the price holding below the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The 14-day Relative Strength Index (RSI) stands below the 50-midline near 37.70, supporting the downward movement of the pair in the near term.
Sustained bearish momentum below 0.6325 could draw in more sellers to 0.6285, the low of October 3, 2023. Any follow-through selling could see a drop to the 0.6200 psychological mark.
On the upside, any follow-through buying above the upper boundary of the trend channel of 0.6512 could pave the way to 0.6626, the 100-day EMA. Sustained trading above the mentioned 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.
