- Australian Dollar depreciates for the second straight session on weaker inflation data from Australia.
- Australia’s Monthly CPI reported 3.4% in December, down from November’s 4.3%.
- Traders expect two rate cuts from the Reserve Bank of Australia in 2024.
- Chinese Non-Manufacturing and Manufacturing PMI improved to 50.7 and 49.2, respectively, in January.
- Fed is expected to maintain interest rates at 5.5% for the fourth consecutive time.
The Australian Dollar (AUD) remains on a downtrend on Wednesday after Australian inflation slowed more than anticipated in the December quarter. This has led traders to factor in the possibility of as many as two rate cuts from the Reserve Bank of Australia (RBA) throughout the year. The prevailing risk-off sentiment is adding further downward pressure on the AUD/USD pair, as market participants exercise caution amid heightened tensions in the Middle East.
Australia’s Monthly Consumer Price Index (CPI) recorded a year-on-year increase of 3.4% in December, down from November’s 4.3% and below the anticipated 3.7%. The RBA Trimmed Mean CPI (YoY) for the fourth quarter stood at 4.2%, a decline from the 5.2% reported previously and also lower than the expected 4.3%. Meanwhile, the CPI (QoQ) figure came in at 0.6%, softer than the anticipated 0.8% and a notable decrease from the previous reading of 1.2%.
The Reserve Bank of Australia’s target range for inflation is 2.0% to 3.0%. Although the current figures are not within this target range, they represent a significant improvement compared to the peak CPI rate of close to 8.0%. The RBA’s policy meeting is scheduled on February 5 and 6, and it is widely expected that the interest rate decision will be to keep interest rates unchanged.
The China Federation of Logistics and Purchasing (CFLP) has released the monthly Non-Manufacturing Purchasing Managers’ Index (PMI), indicating an improvement in the performance of China’s service sector for January. The reading came in at 50.7, slightly surpassing the expected figure of 50.6. Concurrently, the Manufacturing PMI also demonstrated improvement, reaching 49.2, meeting the anticipated value and advancing from the previous reading of 49. These improved figures could help in limiting the losses of the Aussie Dollar, given that Australia and China are close trade partners.
The US Dollar Index (DXY) faces a challenge due to the subdued United States (US) Treasury yields. The risk aversion sentiment could intensify as the administration of US President Joe Biden is anticipated to authorize military strikes in response to the recent drone attack on a US outpost in Jordan. Investors will keep an eye on US ADP Employment Change on Wednesday ahead of the US Nonfarm Payrolls later this week.
The Federal Open Market Committee (FOMC) is widely expected to maintain interest rates in the range of 5.25–5.50% for the fourth consecutive time in Wednesday’s meeting. During the Federal Reserve’s (Fed) December meeting, officials foresaw three rate cuts in 2024. Investors are keenly awaiting signals from Fed Chairman Jerome Powell. Rate swap markets have witnessed a gradual extension of rate cut expectations, and the CME’s FedWatch Tool indicates a 43% probability of the first-rate cut from the Fed in March. In contrast, back in December, swaps initially implied over an 80% chance of a rate trim in March. Furthermore, there is a 53% chance of a 25 basis points rate cut in May.
Daily Digest Market Movers: Australian Dollar declines after softer Aussie inflation data
- Australia’s Retail Sales (MoM) for December indicated a decline of 2.7%. This figure contrasted with the expected fall of 0.9% and marked a notable reversal from the previous growth of 2.0%.
- Australia’s Manufacturing PMI increased from 47.6 to 50.3, showcasing improvement. Services PMI also saw an uptick, rising from 47.1 to 47.9. The Composite PMI registered an increase, reaching 48.1 compared to December’s 46.9.
- US balance sheet showed that since October 2023, the decrease in yields has contributed to the sustainability of the US Treasury, and stronger economic growth has led to improved tax receipts. The US Treasury Department recently announced plans to borrow $760 billion in the first quarter, which is lower than the previous estimate of $816 billion in October.
- US JOLTS Job Openings improved to 9.026M in December from 8.925M prior, exceeding the anticipated 8.75M.
- US Housing Price Index (MoM) was unchanged at the reading of 0.3% in November.
- US Core Personal Consumption Expenditures Price Index (PCE) for December showed a 0.2% monthly increase, in line with expectations, compared to 0.1% in the previous reading. The yearly Core PCE rose 2.9%, falling short of the 3.0% expected and the previous reading of 3.2%.
- The US Gross Domestic Product Annualized (Q4) reported a reading of 3.3% against the previous reading of 4.9%, exceeding the market consensus of 2.0%.
Technical Analysis: Australian Dollar maintains its position above the major level of 0.6550
The Australian Dollar trades around 0.6560 on Wednesday followed by the previous week’s low at 0.6551, aligning with the significant level at 0.6550. The pair could retest the monthly low at 0.6524 if this support is breached. On the upside, the AUD/USD pair could encounter initial resistance at the psychological level of 0.6600 aligned with the 23.6% Fibonacci retracement level at 0.6606. A breakthrough above the latter could lead the AUD/USD pair to test the 21-day Exponential Moving Average (EMA) at 0.6622 followed by the key resistance level at 0.6650.
AUD/USD: Daily Chart
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Australian Dollar price today
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the weakest against the US Dollar.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.23% | 0.13% | 0.13% | 0.36% | 0.25% | 0.25% | 0.14% | |
| EUR | -0.22% | -0.09% | -0.09% | 0.17% | 0.04% | 0.05% | -0.07% | |
| GBP | -0.12% | 0.10% | 0.01% | 0.25% | 0.13% | 0.14% | 0.03% | |
| CAD | -0.13% | 0.10% | -0.03% | 0.23% | 0.12% | 0.12% | 0.02% | |
| AUD | -0.37% | -0.15% | -0.24% | -0.24% | -0.12% | -0.12% | -0.23% | |
| JPY | -0.25% | -0.03% | -0.15% | -0.12% | 0.14% | -0.03% | -0.11% | |
| NZD | -0.26% | -0.01% | -0.14% | -0.13% | 0.10% | -0.01% | -0.11% | |
| CHF | -0.14% | 0.07% | -0.03% | -0.01% | 0.22% | 0.11% | 0.12% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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- Source: https://www.fxstreet.com/news/australian-dollar-loses-ground-after-the-softer-aussie-inflation-data-fed-decision-eyed-202401310233
