- Australian Dollar continues its winning streak after the positive Services PMI on Thursday.
- Australia’s ASX 200 extends losses on weak sentiment due to expectations of prolonged higher borrowing costs.
- FOMC Minutes reflect caution regarding interest rate cuts that could potentially delay the start of an easing cycle.
- US Dollar faces challenges as US Treasury yields retrace recent gains.
- Investors await S&P US PMI data, weekly Initial Jobless Claims, and Existing Home Sales on Thursday.
The Australian Dollar (AUD) extends its winning streak on Thursday that began on February 14. This positive momentum was fueled by encouraging preliminary Australian Purchasing Managers Index (PMI) data. The data indicated a notable return to growth in private sector activity in February, marking the end of a five-month downturn, particularly driven by robust expansion in the services sector. However, the manufacturing sector encountered difficulties due to increased interest rates, leading to the most significant decline in output since May 2020.
Australian Dollar (AUD) could face hurdles stemming from softer Aussie money markets, as the S&P/ASX 200 Index registers its third consecutive decline amidst subdued sentiment. The recent release of the Federal Open Market Committee (FOMC) Minutes, expressing caution regarding interest rate cuts, might postpone the onset of an easing cycle. Additionally, the Reserve Bank of Australia’s (RBA) meeting minutes earlier this week shifted market sentiment towards the probability of no imminent rate cuts.
The US Dollar Index (DXY) encountered downward pressure despite the rise in US Treasury yields on Wednesday following the cautious tone expressed in the FOMC Minutes regarding the pace of interest rate reductions. The Meeting Minutes highlighted the necessity for further evidence of disinflation to alleviate concerns about upside risks. Presently, futures in funds indicate that approximately 70% of the market anticipates a rate cut by the Fed’s June meeting. According to the CME FedWatch Tool, there’s now a 52.2% probability assigned by the market for the initiation of easing to commence in June.
Daily Digest Market Movers: Australian Dollar strengthens on improved Services PMI
- Judo Bank Australia Composite PMI increased to 51.8 in February from the previous reading of 49, indicating the first month of expansion in the Australian private sector after a five-month period of contraction.
- Judo Bank Australia Services PMI rose to 52.8 from the previous reading of 49.1. Manufacturing PMI fell to 47.7 from 50.1 prior due to a significant drop in new orders.
- Australian Wage Price Index (QoQ) grew by 0.9% in the fourth quarter as expected, lower than the previous rise of 1.3%. The index rose by 4.2% year-over-year, surpassing the market expectation to be unchanged at 4.1%.
- Westpac Leading Index (MoM) declined by 0.1% in January against the previous reading of flat 0.0%.
- The ANZ-Roy Morgan Consumer Confidence improved to 82.8 this week from 82.6 prior. Remarkably, the index has now spent a record 55 consecutive weeks below the mark of 85.
- RBA’s Meeting Minutes revealed that the Board deliberated on the possibility of raising rates by 25 basis points (bps) or keeping rates unchanged. While recent data indicated that inflation would return to target within a reasonable timeframe, it was acknowledged that this process would “take some time.” Consequently, the board agreed that it was prudent not to rule out another rate hike.
- S&P’s analysis of the FOMC minutes suggests that inflation is expected to continue cooling in the upcoming months, despite the ongoing uneven disinflationary trends. They maintain their outlook for monetary policy in 2024, anticipating no changes. S&P predicts that the Federal Reserve will likely reduce its policy rate by 25 basis points at its June meeting, with further cuts totaling 75 basis points by the end of the year.
- Richmond Federal Reserve Bank President Thomas Barkin told Reuters that the United States still has “ways to go” to achieve a soft landing. He highlighted the overall positive trajectory of US data concerning inflation and employment. However, Barkin noted that recent figures on the Producer Price Index (PPI) and Consumer Price Index (CPI) have been less favorable, indicating a reliance on disinflation from goods. He suggested that the US is nearing the end of its inflation challenge, with the pressing question being the duration until resolution.
Technical Analysis: Australian Dollar maintains its position above the major support of 0.6550
The Australian Dollar traded around the major level at 0.6560 on Thursday, which is positioned above the immediate support level of 0.6550. A break below this major level could retest the weekly low at 0.6521 followed by the psychological support level of 0.6500. On the upside, the AUD/USD pair could face a key resistance area around the 50-day Exponential Moving Average (EMA) at 0.6574 and the three-week high at 0.6579. A break above this region could lead the AUD/USD pair to approach the resistance zone around the psychological level of 0.6600 and 38.2% Fibonacci retracement level of 0.6606.
AUD/USD: Daily Chart
Australian Dollar price this week
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies this week. Australian Dollar was the strongest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.39% | -0.23% | 0.05% | -0.22% | 0.20% | -0.87% | -0.21% | |
| EUR | 0.39% | 0.16% | 0.44% | 0.17% | 0.59% | -0.46% | 0.18% | |
| GBP | 0.23% | -0.16% | 0.28% | 0.01% | 0.43% | -0.63% | 0.02% | |
| CAD | -0.05% | -0.43% | -0.28% | -0.27% | 0.15% | -0.91% | -0.26% | |
| AUD | 0.22% | -0.17% | -0.01% | 0.27% | 0.42% | -0.65% | 0.01% | |
| JPY | -0.20% | -0.58% | -0.40% | -0.15% | -0.42% | -1.06% | -0.42% | |
| NZD | 0.86% | 0.46% | 0.62% | 0.90% | 0.64% | 1.04% | 0.64% | |
| CHF | 0.21% | -0.18% | -0.02% | 0.26% | -0.01% | 0.42% | -0.65% |
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-gains-ground-on-improved-aussie-services-pmi-subdued-us-dollar-202402220200
