- Australian Dollar loses ground after the release of improved PMI figures.
- Australian Manufacturing and Services PMI increased to 50.3 and 47.9, respectively.
- The upbeat Australian share market provides support for the AUD.
- US Dollar demand persists on risk aversion sentiment as geopolitical tensions escalate.
- US forces carried out strikes on Iran-backed Kataib Hezbollah militia group in Iraq.
The Australian Dollar (AUD) retraces its recent gains on Wednesday despite the improved preliminary Purchasing Managers Index (PMI) from Australia, released on a monthly basis by Judo Bank and S&P Global. However, the US Dollar (USD) maintains stability, holding its positive position from the previous session, despite a decrease in the 2-year United States (US) bond yield.
Australia’s PMI data revealed a positive shift in business activity in January across all sectors. The 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. Furthermore, Australian shares continued their upward trajectory, setting a third consecutive record high. The surge was attributed to increased performance in miners and energy stocks, serving as a favorable factor for the AUD/USD pair.
The US Dollar Index (DXY) remains stable after its recent upswing, as buying interest in the US Dollar persists due to risk aversion sentiment. This trend is likely associated with the escalated geopolitical tensions in the Middle East. The US Secretary of Defense issued a statement confirming that “US military forces carried out essential and proportional strikes on three facilities utilized by the Iranian-backed Kataib Hezbollah militia group and other Iran-affiliated groups in Iraq.” These actions were a direct response to a sequence of escalating attacks.
Traders are likely anticipating the release of the S&P Global Purchasing Managers Index data from the United States on Wednesday. This data is expected to provide crucial insights into business activities within the nation, influencing market sentiments about the Federal Reserve’s (Fed) interest rate trajectory.
Money market futures have reduced the likelihood of a rate cut by the Fed in March. However, by May, there is full pricing in of a 25 basis point (bps) cut, and the probability of a more substantial 50 bps cut stands at 50%.
Daily Digest Market Movers: Australian Dollar improves on positive PMI data
- Australia’s Westpac Leading Index (MoM) declined by 0.03% in December against November’s growth of 0.07%.
- National Australia Bank’s Business Conditions inched down to the reading of 7 in December from 9 prior.
- National Australia Bank’s Business Confidence improves to -1 from the previous figure of -9.
- Australia’s Consumer Inflation Expectations remained steady at 4.5% in January.
- The Chair of Australia’s sovereign wealth fund Peter Costello commented that inflation in Australia is showing early signs of moderation. However, Costello emphasizes that there is still a considerable distance to cover to bring prices back within the RBA’s target band.
- The People’s Bank of China keeps its Loan Prime Rate (LPR) steady for both the one-year and five-year terms. The rate remains at 3.45% for the one year and 4.20% for the five years.
- US Conference Board has reported a slight improvement in the Leading Economic Index for December, moving from -0.5% in November to -0.1% in December. This surpassed expectations for an improvement to -0.3%.
- The preliminary US Michigan Consumer Sentiment Index rose to 78.8 in January from 69.7 prior, exceeding the expected figure of 70.
Technical Analysis: Australian Dollar hovers below the psychological level at 0.6600
The Australian Dollar trades around 0.6580 on Wednesday, with immediate resistance noted at the psychological level of 0.6600 aligned with the nine-day Exponential Moving Average (EMA) at 0.6603 before the 23.6% Fibonacci retracement level at 0.6606. A firm breakthrough above the resistance zone could help the pair approach the major barrier at 0.6650 followed by the 38.2% Fibonacci retracement at 0.6657. On the downside, the AUD/USD pair could revisit the weekly low at 0.6551 aligned with the major level at 0.6550. A break below the latter could push the pair to retest the monthly low at 0.6524.
AUD/USD: Daily Chart
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 Japanese Yen.
USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
USD | -0.01% | -0.02% | 0.11% | 0.23% | -0.13% | 0.18% | 0.00% | |
EUR | 0.01% | -0.01% | 0.11% | 0.20% | -0.12% | 0.17% | 0.02% | |
GBP | 0.02% | 0.00% | 0.12% | 0.21% | -0.12% | 0.18% | 0.01% | |
CAD | -0.11% | -0.08% | -0.12% | 0.09% | -0.24% | 0.06% | -0.11% | |
AUD | -0.22% | -0.21% | -0.21% | -0.10% | -0.33% | -0.07% | -0.23% | |
JPY | 0.13% | 0.12% | 0.13% | 0.22% | 0.36% | 0.29% | 0.13% | |
NZD | -0.16% | -0.19% | -0.20% | -0.07% | 0.04% | -0.29% | -0.19% | |
CHF | -0.01% | -0.02% | -0.03% | 0.10% | 0.25% | -0.14% | 0.18% |
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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