Australian dollar depreciates, downside appears limited as risk sentiment improves

• The Aussie dollar could regain ground as market sentiment improves amid China’s stimulus measures.
• Australian Treasurer Jim Chalmers hailed China’s new stimulus measures as a “really welcome development”.
• Higher US Treasury yields help support the US dollar.

The Australian dollar (AUD) is lower against the US dollar (USD) on Friday. AUD/USD receives downward pressure from Greenback stability amid improving US Treasury yields. However, the risk-sensitive AUD’s downside could be re-educated as news of additional stimulus from China, its largest trading partner, lifted market sentiment globally.

Australian Treasurer Jim Chalmers is currently in China to strengthen economic ties between the two nations. During his visit, Chalmers held frank and productive discussions with the National Development and Reform Commission (NDRC). He singled out 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”.

The US dollar could face pressure following dovish remarks from Federal Reserve officials. Fed Governor Lisa Cook said on Thursday she supported last week’s 50 basis point (bps) interest rate cut, citing increased “downside risks” to employment, according to Reuters.

Traders are now expected to closely monitor US Personal Consumer Expenditure (PCE) Price Index data for August, which is scheduled to be released later in the North American session.

Daily Digest Market Movers: Australian dollar is down despite positive market sentiment

• Annualized US Gross Domestic Product rose at a 3.0% rate in the second quarter, as previously estimated, according to the US Bureau of Economic Analysis (BEA). Meanwhile, the GDP price index rose 2.5 percent in the second quarter.
• US initial jobless claims for the week ended September 20 were reported at 218K, according to the US Department of Labor (DoL). This figure was below the initial consensus of 225K and was lower than the previous week’s revised number of 222K (previously reported as 219K).
• 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.
• The Commonwealth Bank of Australia (CBA) expects the RBA to revise its consumption forecasts downward in November. The RBA has already acknowledged downside risks to its current outlook. This potential revision, combined with expectations of further unemployment growth and lower average inflation in line with CBA forecasts, could position the RBA to implement rate cuts before the end of the year.
• Federal Reserve Governor Adriana Kugler said Wednesday that she “strongly supported” the Fed’s decision to cut interest rates by half a point last week. Kugler also said further rate cuts would be appropriate if inflation continues to fall as expected, according to Bloomberg.
• In a recent note, JP Morgan advised investors to monitor commodity and bond yields in light of the positive market outlook following China’s stimulus proposals on Tuesday. The bank pointed out that global growth has received a new boost from China, a factor that has been missing in recent years. This development significantly reduces the risk of recession and is considered favorable for the markets. However, JP Morgan also warned of the potential risk of re-inflation.
• Australia’s monthly consumer price index rose 2.7% year-on-year in August, down from a previous increase of 3.5% and expected to rise 2.8%.

Technical analysis: AUD hovers around the lower boundary of the ascending channel near 0.6900

AUD/USD is trading near 0.6880 on Friday. Technical analysis of the daily chart shows that the pair is positioned near the lower boundary of an ascending channel pattern, with further movement likely to provide a clearer indication of market bias. Furthermore, the 14-day Relative Strength Index (RSI) remains above the 50 level, indicating that bullish sentiment is still maintained.

In terms of resistance, the AUD/USD pair could explore the region around the upper boundary of the ascending channel around the 0.6990 level.

On the downside, a break below the lower limit of the ascending channel could weaken the bearish trend and lead the AUD/USD pair to test the nine-day exponential moving average (EMA) at 0.6832. The next significant support is at the psychological level of 0.6700, followed by the six-week low of 0.6622.

AUD/USD: Daily chart