The Australian dollar appreciates on risk-on sentiment ahead of the US Fed’s interest rate decision

VaselineSeptember 18, 2024

0 5 minutes read

The Australian dollar appreciates on risk-on sentiment ahead of the US Fed’s interest rate decision

Aussie dollar extends advantage as risk sentiment improves ahead of Fed decision.
The Reserve Bank of Australia’s dovish stance supports the Australian dollar.
The US dollar is struggling as the odds of a 50 basis point Fed rate cut on Wednesday increase.

The Australian dollar (AUD) extended its gains for a third straight day against the US dollar (USD) on Wednesday. Investors await the Federal Reserve’s (Fed) interest rate decision later in the day, although rising expectations of a 50 basis point cut should support risk-sensitive currencies such as the AUD.

AUD/USD may advance further as the Australian dollar remains supported by the Reserve Bank of Australia’s (RBA) dovish stance. RBA governor Michele Bullock said it was premature to consider rate cuts because of persistently high inflation. In addition, RBA Deputy Governor Sarah Hunter noted that while the labor market remains tight, wage growth appears to have peaked and is expected to slow further.

The Federal Reserve is expected to cut interest rates at its September meeting after a steady rate range of 5.25% to 5.5% since July 2023. The CME FedWatch tool indicates that markets are assigning a 33.0 probability % of a rate of 25 basis points. cut, while the probability of a 50 basis point cut rose to 67.0%, up from 62.0% just the previous day.

Daily Digest Market Movers: Aussie gains ground on Fed-friendly policy outlook

JP Morgan CEO Jamie Dimon said Tuesday that if the Federal Reserve cuts interest rates by 25 or 50 basis points, the impact “will not be earth-shattering.” Dimon stressed, “They have to,” but noted that such moves are relatively minor in the grand scheme of things because “there’s a real economy” operating under the Fed’s rate swings, according to Bloomberg.
US retail sales rose 0.1% month-on-month in August after a revised 1.1% rise in July, beating expectations for a 0.2% decline and pointing to resilient consumer spending. Meanwhile, the Retail Sales Control Group rose 0.3%, slightly below the previous month’s 0.4% increase.
ANZ-Roy Morgan Consumer Confidence rose 1.8 points to an eight-week high of 84.1. While ANZ notes that growth has been broad-based, confidence remains firmly in pessimistic territory.
Economists at Goldman Sachs and Citi cut their forecasts for China’s GDP growth in 2024 to 4.7 percent, missing Beijing’s target of around 5.0 percent. SocGen describes the situation as a “downward spiral”, while Barclays calls it “from bad to worse” and a “vicious circle”. Morgan Stanley also warns that “things could get worse before they get better,” according to a Reuters report.
The University of Michigan’s consumer sentiment index rose to 69.0 in September, beating market expectations of a 68.0 reading and marking a four-month high. This increase reflects a gradual improvement in consumers’ outlook on the US economy after months of declining economic expectations.
China’s economy weakened in August, with industrial activity continuing to slow and property prices falling, as Beijing faces mounting pressure to boost spending to boost demand. According to Business Standard, this was reported by the Office for National Statistics on Saturday.
Australian consumer inflation expectations fell to 4.4% in September, down slightly from August’s peak of 4.5%. This decline highlights the central bank’s efforts to balance reducing inflation within a reasonable timeframe and maintaining gains in the labor market.

Technical analysis: Australian dollar remains above 0.6750; the next barrier appears at seven-month highs

AUD/USD is trading near 0.6760 on Wednesday. Technical analysis of the daily chart indicates that the pair is positioned below the lower limit of the rising wedge pattern, indicating a potential bearish reversal. However, the 14-day Relative Strength Index (RSI) remains above the 50 level, suggesting a continued uptrend.

On the upside, a return to the upside wedge would reinforce the uptrend and push the AUD/USD pair to test a seven-month high of 0.6798, followed by the 0.6800 level. Additional resistance appears at the upper boundary of the rising wedge at the 0.6820 level.

On the downside, the AUD/USD pair could find immediate support around the nine-day EMA at 0.6730, followed by the psychological level of 0.6700. A break below the latte could lead the pair to navigate the region around the support area for a retracement near 0.6575.

AUD/USD: Daily chart

Australian Dollar PRICE Today

The table below shows the percentage change of the Australian Dollar (AUD) against the major listed currencies today. The Australian dollar was the strongest against the US dollar.

	USD	EURO	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.12%	-0.05%	-0.58%	-0.06%	-0.16%	-0.32%	-0.23%
EURO	0.12%		0.06%	-0.46%	0.05%	-0.03%	-0.22%	-0.10%
GBP	0.05%	-0.06%		-0.50%	-0.02%	-0.09%	-0.28%	-0.15%
JPY	0.58%	0.46%	0.50%		0.51%	0.42%	0.26%	0.38%
CAD	0.06%	-0.05%	0.02%	-0.51%		-0.10%	-0.26%	-0.13%
AUD	0.16%	0.03%	0.09%	-0.42%	0.10%		-0.16%	-0.05%
NZD	0.32%	0.22%	0.28%	-0.26%	0.26%	0.16%		0.11%
CHF	0.23%	0.10%	0.15%	-0.38%	0.13%	0.05%	-0.11%

The heatmap shows the percentage changes of major currencies against each other. The base currency is chosen from the left column, while the quoted currency is chosen from the top row. For example, if you choose the Australian dollar in the left column and move along the horizontal line to the US dollar, the percentage change shown in the box will be AUD (base)/USD (quote).

Australian Dollar FAQ

One of the most important factors for the Australian dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country, another key factor is the price of its biggest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is Australia’s inflation, growth rate and trade. Balance. Market sentiment – whether investors are taking riskier assets (risk-on) or seeking safe havens (risk-off) – is also a factor, with risk positive for the AUD.

The Reserve Bank of Australia (RBA) influences the Australian dollar (AUD) by setting the level of interest rates at which Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main aim of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence lending conditions, the former AUD-negative and the latter AUD-positive.

China is Australia’s largest trading partner, so the health of the Chinese economy has a major influence on the value of the Australian dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, increasing demand for the AUD and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Therefore, positive or negative surprises in China’s growth data often have a direct impact on the Australian dollar and its pairs.

Iron ore is Australia’s biggest export, accounting for $118 billion a year, according to 2021 data, with China as the main destination. Therefore, the price of iron ore can be a driver of the Australian dollar. Generally, if the price of iron ore rises, so does the AUD, as aggregate demand for the currency rises. The opposite is true if the price of iron ore falls. Higher iron ore prices also tend to result in a higher likelihood of a positive trade balance for Australia, which is also positive for the AUD.

The balance of trade, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian dollar. If Australia produces highly sought after exports, then its currency will only gain in value from the excess demand created by foreign buyers wanting to buy its exports over what it spends on buying its imports. A positive net trade balance therefore strengthens the AUD, with the opposite effect if the trade balance is negative.

VaselineSeptember 18, 2024

0 5 minutes read