Market Data 
- The Australian Dollar falls as the US Dollar remains solid amid a resilient US economy.
- The Aussie Dollar may limit its downside as an RBA rate cut is unlikely in the near term.
- The US Dollar appreciates as recent positive US data supports the sentiment of nominal rate cuts by the Fed.
The Australian Dollar (AUD) extends its decline against the US Dollar (USD) for the third consecutive session on Tuesday. Traders are now focused on Australia’s third-quarter Consumer Price Index (CPI) data, due for release on Wednesday, as they seek further insights into the Reserve Bank of Australia’s (RBA) potential monetary policy direction.
The AUD’s downside may be limited by the Reserve Bank of Australia’s hawkish stance on its policy outlook. The RBA has indicated that the current cash rate of 4.35% is restrictive enough to steer inflation back within the target range of 2%-3% while still supporting employment. Consequently, a rate cut is unlikely in the near term, especially as early as next month.
The US Dollar (USD) gains strength as positive US economic data from last week indicates continued resilience in the economy. This supports the sentiment of nominal interest rate cuts by the Federal Reserve (Fed) in November.
Traders await the release of the preliminary US Q3 Gross Domestic Product (GDP) figures and October’s Nonfarm Payrolls (NFP) report, which could provide key insights into the timing and pace of the Federal Reserve’s (Fed) anticipated rate cuts.
Daily Digest Market Movers: Australian Dollar depreciates as US Dollar gains ground
- According to the CME FedWatch Tool, there is a 95.8% probability of a 25-basis-point rate cut by the Fed in November, with no expectation of a more substantial 50-basis-point cut.
- ANZ-Roy Morgan Australia Consumer Confidence dropped to 86.4 this week, down from 87.5 the previous week.
- Australia’s 10-year government bond yield hovers near 4.5%, mirroring a rise in US bond yields. This increase is driven by market sentiment increasingly favoring Former President Donald Trump in the upcoming US presidential election and expectations that the Fed may adopt a more cautious stance on future rate cuts.
- According to polling site FiveThirtyEight, Trump’s possibility of winning the US election has increased to 52% compared to 48% for Vice President Kamala Harris.
- Over the past three weeks, allies of former President Donald Trump have faced at least 10 court defeats in key battleground states that could impact the outcome of the November 5 election between Republican candidate Trump and his Democratic opponent, Vice President Kamala Harris.
- Recent comments from Iran’s Foreign Ministry spokesperson, Esmaeil Baghaei, about potentially using “all available tools” to respond to Israel’s recent attacks on military targets in Iran, signal a risk of further escalation. Such statements increase global uncertainty, fueling investor demand for safe-haven assets like the USD as they brace for potential conflict.
- Last week, Federal Reserve Bank of San Francisco President Mary Daly stated in a post on the social media platform X that the economy is clearly in a better position, with inflation having fallen significantly and the labor market returning to a more sustainable path.
- RBA Deputy Governor Andrew Hauser highlighted the country’s strong labor participation rate last week and stressed that although the RBA relies on data, it is not overly fixated on it.
Technical Analysis: Australian Dollar falls toward 0.6550, lower boundary of the descending channel
AUD/USD trades near 0.6570 on Tuesday. The daily chart analysis points to a short-term bearish bias as the pair continues to move lower within a descending channel. The 14-day Relative Strength Index (RSI) is nearing 30, reinforcing the bearish bias.
On the support side, the pair could test the lower boundary of the descending channel around the 0.6540 level.
For resistance, the first hurdle lies at the psychological level of 0.6600, followed by the descending channel’s upper boundary at 0.6610. A breakout above this point could open the door for a move toward the nine-day Exponential Moving Average (EMA) at 0.6634.
AUD/USD: Daily Chart
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.
