The Australian dollar extends a winning streak on the back of retail sales

• The Australian dollar gains ground as retail sales beat expectations for growth in August.
• AUD remains solid as RBA to keep monetary policy tight in the near term.
• The US dollar advanced as Fed Chairman Powell said the central bank would cut its benchmark rate “over time”.

The Australian dollar (AUD) held gains against the US dollar (USD) on Tuesday following better-than-expected retail sales data. The Australian Bureau of Statistics (ABS) reported Australia’s leading indicator of consumer spending rose 0.7% month-on-month in August, beating market expectations for a 0.4% rise.

The AUD is getting support from the dovish sentiment around the Reserve Bank of Australia (RBA) on the interest rate path. The RBA kept its cash rate at 4.35% for the seventh consecutive meeting and said policy would need to remain tight to ensure inflation slows. In addition, China’s stimulus measures have improved the demand outlook in Australia’s largest trading partner, boosting commodity prices and strengthening the commodity-linked Australian dollar.

AUD/USD’s gains could be limited due to a stronger US Dollar (USD), which could be attributed to the latest remarks by Federal Reserve (Fed) Chairman Jerome Powell. On Monday, Powell said the central bank was in no rush and would cut its key rate “over time.” Fed Chairman Powell added that the recent half-point interest rate cut should not be seen as an indication of similarly aggressive actions to come, noting that future rate changes are likely to be more modest.

Daily Digest Market Movers: Australian dollar appreciates on RBA policy outlook calls

• The CME FedWatch tool indicates that markets assign a 61.8 percent probability of a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point rate cut fell to 38.2 %, down from 53.3% a day ago.
• China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) fell to 49.3 in September, indicating a contraction, from 50.4 in August. Meanwhile, China’s NBS manufacturing PMI improved to 49.8 in September, up from 49.1 the previous month and beating the market consensus of 49.5.
• The President of the Federal Reserve in St. Louis Alberto Musalem said on Friday, according to the Financial Times, that the Fed should start cutting interest rates “gradually” after a half-point cut larger than usual at its September meeting. Musalem acknowledged the possibility that the economy could weaken more than anticipated, saying, “If that were the case, then a faster pace of rate cuts might be appropriate.”
• On Friday, the US Personal Consumer Expenditure (PCE) price index for August rose 0.1% on the month, below expectations for a 0.2% rise, in line with the Federal Reserve’s view that inflation is easing in the US economy. This strengthened the possibility of an aggressive rate cut cycle by the Fed.
• During his visit to China, Australian Treasurer Jim Chalmers had frank and productive discussions with the National Development and Reform Commission (NDRC). Chalmers highlighted China’s economic slowdown as a key factor in weaker global growth, while hailing the country’s new stimulus measures as a “really welcome development”.
• China plans to inject more than CNY 1 trillion in capital into its biggest state-owned banks, facing challenges such as shrinking margins, falling profits and rising bad loans. This substantial infusion of capital would mark the first of its kind since the 2008 global financial crisis.
• According to the Reserve Bank of Australia’s September 2024 Financial Stability Review, Australia’s financial system remains resilient, with risks largely contained. However, notable concerns include stress in China’s financial sector and the limited response from Beijing to address these issues. Domestically, a small but growing proportion of Australian home borrowers fall behind on their payments, although only around 2% of owner-occupier borrowers are at serious risk of default.

Technical analysis: Australian dollar holds above 0.6900, the lower limit of an ascending channel

AUD/USD is trading near 0.6930 on Tuesday. A technical analysis of the daily chart shows that the pair is trending upward in an ascending channel. The pair held above the lower boundary of the channel, suggesting that the uptrend remains intact. Furthermore, the 14-day Relative Strength Index (RSI) is slightly below the 70 level, reinforcing positive momentum.

In terms of resistance, AUD/USD may target the area near the upper limit of the ascending channel around the 0.7020 level. A successful break above the ascending channel could indicate new bullish momentum. However, if the pair fails to breach this resistance, a pullback inside the channel is possible.

On the downside, immediate support appears at the lower limit of the ascending channel around the 0.6890 level, followed by the nine-day EMA at the 0.6866 level. A break below this EMA could weaken the bullish trend and lead the AUD/USD pair to cruise in the region around its six-week low of 0.6622.

AUD/USD: Daily chart