Australian Dollar appreciates due to improved risk sentiment, stronger China Services PMI

The Australian Dollar appreciates due to the risk-on mood on Wednesday.
Australia’s GDP grew 0.1% QoQ in the first quarter, falling short of the expected 0.2% reading.
Caixin China Services PMI came in at 54.0 in May, marking the 17th consecutive month of expansion in services activity.
The US Dollar could rebound due to the higher US Treasury yields.

The Australian Dollar (AUD) gains ground, possibly due to improved risk sentiment on Wednesday. The upside of the Aussie Dollar could be limited due to the lower-than-expected Gross Domestic Product data, which grew 0.1% QoQ in the first quarter, against the expected 0.2% reading. On an annual basis, the economy grew 1.1%, slightly below the expected 1.2%. The AUD/USD pair received pressure as the Judo Bank Purchasing Managers Index (PMI) came in at 52.5, lower than the expected reading of 53.1 for May.

The Reserve Bank of Australia (RBA) Governor Michele Bullock stated on Wednesday that she anticipates GDP growth for the first quarter to be quite low. Bullock also emphasized that the central bank is prepared to take action if the Consumer Price Index (CPI) does not return to the target range, as reported by NCA NewsWire.

The US Dollar (USD) could rebound due to the upward correction in US Treasury yields. The USD weakened on the back of rising speculation of an interest rate cut by the Federal Reserve (Fed) this year. Investors await the key US data releases later on Wednesday, including the US ADP Employment Change and ISM Services PMI reports.

Daily Digest Market Movers: Australian Dollar appreciates despite softer economic growth

The Judo Bank Composite PMI recorded a reading of 52.1 in May, a slight decrease from 53.0 in April. This shows that Australia’s private sector output continued to grow for the fourth consecutive month, though at a slower rate.
Caixin China Services PMI came in at 54.0 in May, surpassing expectations of 52.6 and the previous figure of 52.5. This marked the 17th consecutive month of expansion in services activity, indicating the fastest pace since July 2023. Any change in the Chinese economy could impact the Australian market as both countries are close trade partners.
The JOLTS US Job Openings declined by 296,000 to 8.059 million in April, down from March’s 8.355 million, marking the lowest level since February 2021. This figure also missed the market consensus of 8.340 million, data showed on Tuesday.
Australia reported on Tuesday a current account deficit of A$4.9 billion (USD 3.2 billion) in the first quarter, marking a significant shift from a downwardly revised surplus of A$2.7 billion in the previous quarter. This result missed market expectations, which had anticipated a surplus of A$5.9 billion.
The ISM Manufacturing PMI unexpectedly dropped to 48.7 in May, down from April’s reading of 49.2 and below the forecast of 49.6. The US manufacturing sector experienced its second consecutive month of contraction.
Australia’s Judo Bank Manufacturing PMI was released on Monday, edging up slightly to 49.7 in May from 49.6 in April, marking the fourth consecutive month of declining conditions in the manufacturing sector.
On Monday, the Caixin China Manufacturing PMI rose to 51.7 in May from 51.4 in April, marking the seventh consecutive month of expansion in factory activity and surpassing the estimates of 51.5. Friday’s NBS PMI data showed that manufacturing activity fell to 49.5 in May from 50.4 in April, missing the market consensus of an increase to 50.5. Meanwhile, the Non-Manufacturing PMI declined to 51.1 from the previous reading of 51.2, falling short of the estimated 51.5.
Last week, Atlanta Fed President Raphael Bostic remarked in an interview with Fox Business that he doesn’t believe further rate hikes should be required to reach the Fed’s 2% annual inflation target. Additionally, New York Fed President John Williams stated that inflation is still too high but should moderate over the second half of 2024. Williams doesn’t feel the urgency to act on monetary policy, per Reuters.

Technical Analysis: Australian Dollar hovers around 0.6650

The Australian Dollar trades around 0.6650 on Wednesday. A daily chart analysis indicates a bullish bias for the AUD/USD pair, as it remains within a rising wedge pattern. Additionally, the 14-day Relative Strength Index (RSI) is slightly above the 50 level, reinforcing this bullish bias.

The AUD/USD pair could potentially target the psychological level of 0.6700, followed by the four-month high of 0.6714 and the upper limit of the rising wedge around 0.6750.

On the downside, immediate support is seen at the 21-day Exponential Moving Average (EMA) at 0.6632, followed by the lower boundary of the rising wedge and the psychological level of 0.6600. A further decline could exert pressure on the AUD/USD pair, potentially pushing it toward the throwback support region at 0.6470.

AUD/USD: Daily Chart

Australian Dollar price today

The table below shows the percentage change of the Australian Dollar (AUD) against listed major currencies today. The Australian Dollar was the strongest against the Japanese Yen.

 
USD
EUR
GBP
CAD
AUD
JPY
NZD
CHF

USD
 
-0.01%
-0.04%
-0.04%
-0.22%
0.23%
-0.18%
0.07%

EUR
0.01%
 
-0.02%
-0.02%
-0.20%
0.26%
-0.15%
0.09%

GBP
0.04%
0.02%
 
0.00%
-0.17%
0.29%
-0.13%
0.11%

CAD
0.04%
0.04%
0.00%
 
-0.17%
0.31%
-0.12%
0.14%

AUD
0.22%
0.20%
0.17%
0.18%
 
0.47%
0.04%
0.28%

JPY
-0.22%
-0.27%
-0.27%
-0.29%
-0.45%
 
-0.42%
-0.17%

NZD
0.18%
0.17%
0.14%
0.14%
-0.04%
0.41%
 
0.25%

CHF
-0.08%
-0.10%
-0.12%
-0.12%
-0.29%
0.17%
-0.25%
 

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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