Australian Dollar extends losses amidst concerns around Australian and Chinese economy

AUD/USD saw a larger decline on Thursday, to land at 0.6550, reverting to the status of being the worst-performing G10 currency.
Persistent concerns about the Chinese economy’s health and the AUD’s ‘high risk’ status continue to add pressure on the AUD.
Weakening Australian economic outlook might make the RBA reconsider its hawkish stance.

In Thursday’s session, the Australian Dollar (AUD) intensified losses against the USD, with AUD/USD falling close to 0.6550 due to multiple headwinds. Continual weakness in China’s economy paired with depreciating iron ore prices are major contributors to the AUD’s decline.

Despite the Australian economy’s sparks of vulnerability, the Reserve Bank of Australia (RBA) remains resistant to rate cuts due to stubbornly high inflation. This stance could potentially hinder further depreciation of the AUD. The RBA is slated to be one of the last central banks among the G10 to implement rate cuts, which may eventually limit the AUD losses.

Daily digest market movers: Aussie’s decline extends, amidst alarming economic indicators in China and Australia

In a ‘risk-off’ sentiment, the AUD registered an intense sell-off, primarily influenced by market worries over the Chinese economy and the Aussie’s conspicuous position as the ‘high risk’ G10 currency.
At the start of the week, the People’s Bank of China (PBoC) decided to cut rates, which sparked fears about the health of the second-largest economy in the world, which happens to be Australia’s biggest trading partner.
In addition, Industrial metals prices were under pressure due to fears of soft Chinese demand.
The Reserve Bank of Australia (RBA) remains hawkish and doesn’t show signs of easing on its stance and markets bet on a hike in Q4.

AUD/USD technical analysis: Bearish outlook is strengthened with the pair now below mains SMAs

The AUD/USD moving below 20, 100, and 200-day Simple Moving Average (SMA) represents a more severe area of concern, suggesting that the downward trends may go further.

The AUD/USD is undergoing a significant nine-day losing streak, losing almost 3.50% in July and indicators are drastically negative, but their oversold nature with the Relative Strength Index (RSI) near 30 might prompt a corrective response.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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