- Aussie remains weak as markets await inflation data, Retail Sales from Australia.
- Soft China outlook generates concerns for Australian economy.
- RBA’s hawkish outlook might bail out the Aussie.
The Aussie continues the week on a soft trajectory with the AUD/USD declining by 0.20% to 0.6535 ahead of Retail Sales and inflation data that will guide market expectations further on the Reserve Bank of Australia’s (RBA) next moves. In the meantime, the economic concerns tied to the Chinese economy keep the Australian currency restrained.
With the Australian economy under pressure, inflation persistently above bounds continues to encourage the RBA to postpone rate cuts. According to forecasts, the RBA is expected to be among the tail-enders of the G10 nations who introduce a rate cut, which should limit the Aussie’s downside.
Daily digest market movers: Aussie expected to continue its weakness with anticipation of Inflation and Retail Sales data
- Perpetual ‘risk-off’ sentiment persists with Australia’s economic bearing heavily influenced by worries over Chinese economic slowdowns. Attention will turn toward June’s and Q2 CPI data on Wednesday.
- Similar to Q1, Australia’s Q2 headline Consumer Price Index (CPI) is projected to manifest a rise of 1.0% QoQ while anticipating an acceleration to 3.8% YoY from the previous 3.6%. Concurrently, the June headline CPI is predicted to drop to 3.8% YoY.
- With the inflation rate substantially outreaching the 2-3% target range, the RBA is projected not to hastily alter its policy. In that sense, the swaps market is seeing the first 25 bps cut next summer.
- Q2 will also watch the release of real Retail Sales data on Tuesday. Retail Sales volume for Q2 is predicted to show a less severe decline of 0.2% QoQ, comparatively lesser than Q1’s 0.4%.
AUD/USD technical analysis: A sustained bearish outlook persists, fundamentals might help in short term
The AUD/USD’s continuation below the 20, 100 and 200-day Simple Moving Average (SMA) poses concerns, hinting at a likely prolongment of the bearish trend.
While indicator signals are still deeply rooted in the negative, the oversold situation might lead to a correction. However, the bullish momentum remains weak, intimating at a potential period of sideways trade barring any fundamental catalysts. The mentioned inflation and Retail Sales figures might open the door for an upward move.
Key support levels have revamped to 0.6530 and 0.6500, while resistance levels remain at 0.6600 (200-day SMA), 0.6610 and 0.6630.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
