Aussie recovers losses following PBoC interest rate decision

VaselineSeptember 20, 2024

0 6 minutes read

Aussie recovers losses following PBoC interest rate decision

The Australian dollar is receiving support against the US dollar due to divergence in central bank policies.
The PBoC decided to keep its one-year and five-year prime lending rates unchanged at 3.35% and 3.85% respectively.
The US dollar is struggling amid the growing likelihood of further interest rate cuts by the Federal Reserve in 2024.

The Australian dollar (AUD) recovers daily losses and extends its winning streak against the US dollar (USD) following the People’s Bank of China (PBoC) interest rate decision on Friday. The PBoC opted to keep its one-year and five-year prime lending rates (LPR) unchanged at 3.35% and 3.85% respectively. As close trading partners, any developments in the Chinese economy can have a significant impact on Australian markets.

The AUD/USD pair received support following Thursday’s labor market report and the Federal Reserve’s (Fed) 50 basis point (bps) interest rate cut on Wednesday. The divergence in monetary policy between the Reserve Bank of Australia’s (RBA) commitment to keep rates higher for longer and the Fed’s easing cycle is expected to affect the pair’s movement in the short term.

The US dollar faces challenges amid rising expectations for further interest rate cuts by the US Federal Reserve by the end of 2024. The latest dot chart projections suggest a gradual easing cycle, with the median rate for 2024 revised to 4.375% from the forecast of 5.125% in June.

Fed Chairman Jerome Powell commented on the aggressive rate cut, saying, “This decision reflects our growing confidence that with the appropriate adjustments to our policy, we can maintain a strong labor market, support economic growth moderate and reduce inflation to a sustainable level. 2% level.”

Daily Digest Market Movers: Australian Dollar Rises Against US Dollar on Central Bank Policy Divergence

US Treasury Secretary Janet Yellen said on Friday that the recent interest rate cut by the Federal Reserve is a very positive indicator for the US economy. According to Yellen, this demonstrates the Fed’s confidence that inflation has fallen significantly and is moving toward the 2% target. Meanwhile, the labor market continues to be strong.
Employment change in Australia came in at 47.5k in August, down from 58.2k in July but well above the consensus forecast of 25.0k. The unemployment rate was steady at 4.2% in August, in line with both expectations and the previous month’s figure, according to data released by the Australian Bureau of Statistics (ABS).
The Federal Open Market Committee (FOMC) cut the federal funds rate to a range of 4.75% to 5.0%, marking the Fed’s first rate cut in four years. This move signals the Fed’s commitment to protect the labor market and steer the economy away from any sign of recession.
Fed policymakers updated their quarterly economic forecasts, raising the average projection for unemployment to 4.4 percent by the end of 2024, up from the 4 percent estimate made in June. They also raised their long-term forecast for the federal funds rate from 2.8 percent to 2.9 percent.
Economists at Goldman Sachs and Citi cut their 2024 GDP growth forecasts for China to 4.7 percent, below Beijing’s target of about 5.0 percent. SocGen describes the scenario as a “downward spiral”, while Barclays refers to it as “from bad to worse” and a “vicious circle”. Morgan Stanley also warned that “things could get worse before they get better,” according to a Reuters report.
China’s economy showed signs of weakness in August, characterized by a continued slowdown in industrial activity and falling property prices. This situation has led to increasing pressure on Beijing to increase spending to boost demand, the National Bureau of Statistics reported on Saturday, according to Business Standard.
Reserve Bank of Australia (RBA) Governor Michele Bullock stressed it was premature to consider rate cuts given 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.

Technical Analysis: Aussie holds bullish wedge position near 0.6800

AUD/USD is trading near 0.6810 on Friday. Technical analysis of the daily chart shows that the pair is moving higher within the rising wedge pattern, signaling a strengthening of a bullish bias. Additionally, the 14-day Relative Strength Index (RSI) is moving towards the 70 mark, indicating a continued uptrend for the pair.

On the upside, AUD/USD may explore the region around the upper boundary of the rising wedge at the 0.6870 level. A break above the rising wedge could help the pair test the psychological level of 0.6900.

On the downside, the AUD/USD pair is testing the lower boundary of the rising wedge around the 0.6800 level. A break below this level could push the pair to test the nine-day Exponential Moving Average (EMA) at 0.6760, with the next support at the psychological level of 0.6700.

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 Canadian dollar.

	USD	EURO	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.03%	-0.05%	-0.31%	0.00%	-0.04%	-0.08%	-0.16%
EURO	0.03%		-0.03%	-0.27%	0.01%	-0.02%	-0.04%	-0.13%
GBP	0.05%	0.03%		-0.25%	0.07%	0.03%	-0.01%	-0.08%
JPY	0.31%	0.27%	0.25%		0.31%	0.25%	0.22%	0.16%
CAD	-0.01%	-0.01%	-0.07%	-0.31%		-0.05%	-0.08%	-0.15%
AUD	0.04%	0.02%	-0.03%	-0.25%	0.05%		-0.01%	-0.12%
NZD	0.08%	0.04%	0.00%	-0.22%	0.08%	0.01%		-0.07%
CHF	0.16%	0.13%	0.08%	-0.16%	0.15%	0.12%	0.07%

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 is 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 20, 2024

0 6 minutes read