Australian Dollar declines continue amidst concerns over Australian and Chinese economy

AUD/USD marked more losses on Wednesday reaching 0.6580.
Concerns over China’s economic health and commodity prices main cause of AUD’s slide.
Australia reported weak Judo PMIs during the Asian session.

In Wednesday’s session, the Australian Dollar (AUD) faced further losses against the USD, with AUD/USD slipping below 0.6600. Worsening concerns over China’s economic health, along with falling iron ore prices and weak Australian Judo Bank Flash PMI, were the primary contributors to the AUD’s continued downfall.

Despite evident signs of faltering strength in the Australian economy, the Reserve Bank of Australia (RBA) stays firm on delaying rate cuts due to persistently high inflation. This stance could potentially restrict any further weakening of the AUD. The RBA appears set to be one of the last central banks among the G10 countries to implement rate cuts, a stance that may potentially extend further AUD gains.

Daily digest market movers: The Aussie suffers a heavy blow amidst troubling economic signs in China, soft Judo PMIs contributes

The Australian Dollar has experienced a significant sell-off heavily influenced by China’s dismal economic prospects.
China’s Q2 Gross Domestic Product (GDP) fell short of expectations due to weak demand both domestically and overseas
Worries regarding sluggish GDP growth in the world’s second-largest economy deepened following the People’s Bank of China (PBoC)’s unexpected rate-cut decision on Monday and a lack of significant spending measures in the Third Plenum.
On Wednesday’s early Asian trading session, preliminary Judo Bank PMI readings indicated that the Composite PMI dipped to 50.2 from the previous release of 50.7.
The Manufacturing PMI showed a slight improvement of 47.4, it fell back into contraction while the Service PMI expanded more slowly at 50.8.

AUD/USD technical analysis: AUD/USD expands correction and loses 100-day SMA

The AUD/USD moving below the 20 and 100-day Simple Moving Average (SMA) indicates an area of concern and suggests that the downward movements might not be just a correction. However, as long as the pair retains a position above the 200-day SMA, the downward adjustments could still be considered ‘corrective’.

Falling below this line could trigger a sell signal. The range traders should monitor for AUD/USD is 0.6600 – 0.6580 as buyers must maintain this area to prevent further losses.

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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