Aussie dollar receives downward pressure due to rising risk aversion

• The Australian dollar falls as rising tensions in the Middle East dampen risk appetite.
• Australia’s trade balance was 5,644 million month-on-month in August, beating estimates of 5,500 million and 5,636 million in July.
• The Israeli Broadcasting Authority reported that the security cabinet will issue a firm response to the recent Iranian attack.

The Australian dollar (AUD) is lower against the US dollar (USD) following key economic data released on Thursday. Additionally, the risk-sensitive AUD/USD pair is receiving downward pressure as rising geopolitical tensions in the Middle East dampen risk appetite.

Australia’s trade balance for August was 5,644 million month-on-month, beating market expectations of 5,500 million and slightly higher than July’s surplus of 5,636 million. However, both exports and imports fell 0.2% month-on-month in August.

However, downside risk to the AUD may be limited due to the dovish outlook surrounding the Reserve Bank of Australia (RBA). Data released earlier this week showed stronger-than-expected retail sales growth for August, reducing the likelihood of an anticipated rate cut by the RBA. Markets have almost entirely discounted the possibility of a rate cut in November. In addition, the AUD is supported by stimulus measures from China, Australia’s largest trading partner, which have boosted commodity prices.

Traders are expected to closely monitor a number of key United States (US) economic data scheduled for release on Thursday, including September’s ISM services purchasing managers’ index (PMI) and initial weekly jobless claims for the previous week.

Daily Digest Market Movers: Australian dollar depreciates on risk-off sentiment

• The CME FedWatch tool indicates that markets assign a 65.4% probability of a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point cut is 34.6% , down from 57.4% a week ago.
• The Israel Broadcasting Authority (IBA) reported that Israel’s security cabinet has decided to issue a firm response to the recent Iranian attack. On Tuesday evening, Iran launched more than 200 ballistic missiles and drone strikes on Israel. Citing political sources in Tel Aviv, the report indicated that while the response will be severe, it is not expected to escalate into a regional war.
• Australia’s Judo Bank Services Purchasing Managers’ Index (PMI) read 50.5 in September, down from 52.5 in August. This marks the eighth consecutive month of growth in services activity, albeit at a slower and marginal pace. Meanwhile, the composite PMI fell slightly to 49.6 in September, compared with 49.8 the previous month, data showed on Thursday.
• Federal Reserve Bank of Richmond President Tom Barkin on Wednesday addressed the Fed’s recent rate actions, warning that the fight against inflation may not be over as risks still linger. Barkin noted that September’s 50 basis point (bps) rate cut was justified because rates had become “out of sync” with falling inflation while the unemployment rate was close to its sustainable level.
• The ADP Employment Change report showed an increase of 143,000 jobs in September, beating the forecast of 120,000 jobs. In addition, annual salary increased by 4.7% year-over-year. The total number of jobs added in August was revised up from 99,000 to 103,000.
• The AiG industry index improved slightly in September, rising 4.9 points to -18.6 from the previous reading of -23.5, although it still signals a contraction for the 29th consecutive month. Meanwhile, the AiG manufacturing PMI continued its decline, falling 2.8 points to -33.6 from -30.8 previously, marking the lowest level in trend terms since the start of the series.
• On Tuesday, the US ISM Manufacturing PMI came in at 47.2 for September, matching the reading with August’s print, but coming in below market expectations of 47.5.
• The Australian Bureau of Statistics (ABS) on Tuesday reported retail sales, Australia’s leading indicator of consumer spending, rose 0.7% month-on-month in August, beating market expectations for a 0.4% rise.
• Federal Reserve (Fed) Chairman Jerome Powell said Monday that the central bank is in no rush and will cut its benchmark rate “over time.” Powell added that the recent half-point interest rate cut should not indicate similarly aggressive future action, noting that future rate changes are likely to be more modest.

Technical Analysis: AUD is moving below 0.6900, ascending channel

AUD/USD is trading near 0.6870 on Thursday. A technical analysis of the daily chart shows that the pair has broken below the ascending channel. This shows an optimistic weakening trend. However, the 14-day Relative Strength Index (RSI) is positioned above the 50 level, supporting bullish sentiment.

In terms of resistance, a return to the ascending channel would strengthen the uptrend and support the AUD/USD pair to target the area near the upper limit of the channel around the psychological level of 0.7020.

On the downside, the AUD/USD pair is testing immediate support at the nine-day exponential moving average (EMA) at 0.6865. A break below this level could trigger a bearish trend and lead the pair to navigate the region around its seven-week low of 0.6622.

AUD/USD: Daily chart