Forex News
- Gold surges to new all-time high above $2,600, fueled by expectations of further Fed rate cuts.
- Safe-haven demand spikes due to escalating tension between Israel and Hezbollah.
- Fed Governor Waller backs 50 bps rate cut; however, dissenting Fed member Michelle Bowman prefers a smaller cut to guard against declaring an early win on inflation.
Gold prices climbed past $2,600, recording new all-time highs amid increasing speculation that the Federal Reserve (Fed) will continue to lower borrowing costs and heightened tensions between Israel and Hezbollah in the Middle East. The XAU/USD trades at $2,621, up 1.37%.
Risk aversion is the game's name, which is portrayed by Wall Street’s three leading indices all posting losses between 0.26% and 0.31%. Fed Governor Christopher Waller stated that cutting 50 basis points was appropriate, citing expectations that the August Personal Consumption Expenditures (PCE) Price Index would be very low.
Waller added that inflation is softening more rapidly than anticipated, which is concerning to him. He also noted that the Fed could take further action if the labor market deteriorates or inflation data soften quickly.
Meanwhile, correlations are not playing a huge role as US Treasury yields rise with Gold prices and the Greenback. The US 10-year Treasury note yields 3.726%, up by one and a half basis points. The US Dollar Index (DXY), which tracks the American currency’s value against the other six, advanced some 0.08% to 100.71.
A scarce economic schedule in the US left Gold’s direction on the shoulders of additional Fed speakers. Michelle Bowman dissented to a 50 bps cut. Although it was appropriate to adjust the policy, she preferred a smaller cut, as risks on the decision could be interpreted as a “declaration of victory on inflation.”
Looking ahead into the next week, the Fed parade begins with Atlanta Fed’s Raphael Bostic, Chicago’s Austan Goolsbee, and Minnesota’s Neel Kashkari. On the data front, S&P Global Flash PMIs, along with housing data and the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, will dictate the XAU/USD forward path.
Daily digest market movers: Gold price traders eye next week’s busy US schedule
- Overall weakness on the US Dollar and elevated tensions in the Middle East kept Gold’s rally underway.
- Bullion prices had risen over 27% in 2024, the biggest annual rise since 2010.
- China and India's physical demand for Gold has overshadowed anemic inflows into Gold-backed ETFs.
- The Summary of Economic Projections indicates the Fed projects interest rates to end at 4.4% in 2024 and 3.4% in 2025.
- Inflation, as measured by the Core Personal Consumption Expenditures Price Index, is estimated to reach its 2% target by 2026, with forecasts of 2.6% in 2024 and 2.2% in 2025.
- US economy will likely grow at a 2% pace in 2024 with the Unemployment Rate rising to 4.4% by the end of the year.
- December 2024 fed funds rate futures contracting suggests that the Fed might lower rates by at least 53 basis points, implying that in the following two meetings this year the market expects one 25 bps cut in November and December.
XAU/USD technical outlook: Gold price hits record highs above $2,600
Gold’s uptrend continues after hitting a new all-time high (ATH) at $2,625. Even though all the signs point upwards, the rally of the golden metal seems overextended, opening the door for a pullback before aiming to new record highs.
Momentum favors buyers. The Relative Strength Index (RSI) aims upwards in bullish territory and not in overbought territory. Therefore, the path of least resistance is tilted to the upside.
XAU/USD's first resistance would be $2,650, followed by the psychological $2,700 figure. In the event of a pullback, the first support would be the $2,600 mark, followed by the September 18 swing low of $2,546. A breach of the latter will expose the August 20 high, which turned into support at $2,531, before aiming toward the September 6 low of $2,485.
Economic Indicator
Fed Interest Rate Decision
The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).
Read more.Last release: Wed Sep 18, 2024 18:00
Frequency: Irregular
Actual: 5%
Consensus: 5.25%
Previous: 5.5%
Source: Federal Reserve
- US Dollar is gaining strength after Fed decision volatility.
- New York Fed's Nowcast model predicts robust economic growth in third and fourth quarters.
- Fed expects financial conditions to remain loose, supporting the economy.
The US economy is experiencing a moderate slowdown, but indicators suggest that economic activity remains robust overall. The Federal Reserve (Fed) has indicated that the pace of its interest rate increases will be determined by economic data.
The upcoming US election will have wide ranging impacts across financial markets, but for now the US Dollar is holding its ground. However, dovish bets on the Fed remain steady and might limit the USD.
Daily digest market movers: US Dollar rises ahead of the weekend on market optimism
- Market optimism is driving the US Dollar higher ahead of the weekend.
- The market is expecting robust growth in Q3, with the New York Fed's Nowcast model tracking Q3 growth at 2.6% SAAR and Q4 growth at 2.2% SAAR.
- Fed is likely pleased that the market is helping to keep financial conditions loose, which should help the economy avoid a hard landing.
- Despite the Fed's efforts to push back against market easing expectations, they have intensified.
- After initially lowering its expectations following the decision, the market is now factoring in an additional 75 basis points of rate cuts by the end of the year.
- Even more unexpected is that the market anticipates close to 250 basis points of further cuts over the next year, which would bring the fed funds rate significantly below the neutral level.
DXY technical outlook: DXY bullish momentum waning, technicals remain bearish
The DXY index has gained some upside momentum, but technical indicators remain bearish.
The Relative Strength Index (RSI) is at 40, near oversold conditions, while the Moving Average Convergence Divergence (MACD) is printing decreasing green bars, implying weak buying pressure.
These indicators suggest that bears are in control and that the index is likely to continue its downtrend. Supports: 100.50, 100.30, and 100.00Resistances: 101.00, 101.30, and 101.60
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
- The NZD/USD upside seems to be limited as buying and selling forces struggle for dominance.
- The RSI suggests a neutral outlook, while the MACD indicates declining selling pressure.
- A crossover between the 100 and 200-day SMA might propel the pair upwards.
The NZD/USD traded mostly flat on Friday’s session and failed to hold gain which took it to a high around 0.6260 as it then retreated to 0.6240.
The Relative Strength Index (RSI) is at 61, in positive territory with a flat slope. This indicates a neutral outlook for the pair, as buying pressure is flat. The Moving Average Convergence Divergence (MACD) histogram is red and decreasing, suggesting that selling pressure is declining.
NZD/USD daily chart
Key support levels include 0.6150, 0.6120, and 0.6100, while resistance levels are 0.6190, 0.6200, and 0.6230. A close above the 20-day SMA, currently at 0.6200, could signal further upward movement with the next target being at early September highs near 0.6300. In addition, traders should monitor the 0.6100 area as the 100 and 200-day SMAs are about to perform a bullish crossover. That could serve as a bullish confirmation and might trigger another upwards leg.
- Mexican Peso continues to weaken, recording losses for three consecutive days amid increasing risk aversion.
- Fed Governor Waller supports the recent 50 bps rate cut, pointing to easing inflation and hinting at further cuts if labor conditions deteriorate.
- Banxico anticipated to lower rates by 25 bps next week, potentially sustaining an appealing interest rate differential to support the Peso.
The Mexican Peso extended its losing streak against the Greenback to three consecutive days, with the currency set to sustain weekly losses. Risk aversion hurts the Peso's prospects, which hasn’t been able to capitalize on the Federal Reserve’s (Fed) decision to lower rates for the first time in four years. This exerts pressure on the US Dollar, but the USD/MXN remains firm and trades at 19.38, printing gains of over 0.42%.
Wall Street reversed course on Friday as traders digested the decisions of three major central banks, particularly the Fed. Fed Governor Christopher Waller said on CNBC that cutting 50 basis points was right, justifying its decision based on estimates that the August Personal Consumption Expenditures Price Index (PCE) will be very low.
Waller added that inflation is softening faster than he thought and is concerned about that. He stated that they could do more if the labor market worsens and if the inflation data softens quickly.
South of the border, Mexico’s economic docket is scarce, and traders are eyeing next week with the release of Economic Activity, Retail Sales, inflation data, and the Bank of Mexico (Banxico) monetary policy decision.
Regarding the political turmoil, the week has been calm since the signing into law of the judicial reform.
Meanwhile, traders are eyeing Banxico’s decision. Most analysts estimate a rate cut of at least 25 basis points from 10.75% to 10.50%, which would reduce the interest rate differential slightly. It should, however, will remain attractive to investors and boost the Mexican currency.
Daily digest market movers: Mexican Peso falls, awaiting next week’s data
- According to different banks and rating agencies, the impact of overhauling the judicial system remains far from being felt. The lack of a state of law and transparency could be factors in adjusting Mexico’s creditworthiness over the longer term.
- On Wednesday, the Fed cut rates by 50 bps, justifying its decision on the progress on inflation, which is sustainably moving toward its 2% goal. The US central bank focus shifted onto the labor market.
- The Fed expects inflation to condense to 2.6% in 2024, 2.2% in 2025, and 2% by 2026, according to the Core Personal Consumption Expenditures Price Index.
- Fed officials estimate the US economy will grow at a 2% pace in 2024, with the Unemployment Rate rising to 4.4% by the end of the year.
- December 2024 fed funds rate futures contracting suggests that the Fed might lower rates by at least 53 basis points, implying that in the following two meetings, the market expects two 25 bps rate cuts left in 2024.
USD/MXN technical outlook: Mexican Peso tumbles as USD/MXN rallies above 19.35
From a technical standpoint, the USD/MXN is upwardly biased despite retreating from around 20.00 toward the September 18 swing low of 19.06. Next week, Banxico is expected to lower rates, which could push the exchange rate out of the 19.00-19.50 range.
Momentum shifted bullishly as the Relative Strength Index (RSI) crossed above its neutral line, while aiming upward.
If the USD/MXN climbs above 19.50, the next resistance would be the 20.00 psychological level. Further upside emerges at the yearly peak at 20.22, followed by the 20.50 mark.
Conversely, if the USD/MXN drops below the September 18 low of 19.06, the psychological 19.00 figure will be exposed. Further losses lie underneath, with buyers' next line of defense being the 50-day Simple Moving Average (SMA) at 18.99, followed by the last cycle low of 18.59, the August 19 daily low.
Mexican Peso FAQs
The Mexican Peso (MXN) is the most traded currency among its Latin American peers. Its value is broadly determined by the performance of the Mexican economy, the country’s central bank’s policy, the amount of foreign investment in the country and even the levels of remittances sent by Mexicans who live abroad, particularly in the United States. Geopolitical trends can also move MXN: for example, the process of nearshoring – or the decision by some firms to relocate manufacturing capacity and supply chains closer to their home countries – is also seen as a catalyst for the Mexican currency as the country is considered a key manufacturing hub in the American continent. Another catalyst for MXN is Oil prices as Mexico is a key exporter of the commodity.
The main objective of Mexico’s central bank, also known as Banxico, is to maintain inflation at low and stable levels (at or close to its target of 3%, the midpoint in a tolerance band of between 2% and 4%). To this end, the bank sets an appropriate level of interest rates. When inflation is too high, Banxico will attempt to tame it by raising interest rates, making it more expensive for households and businesses to borrow money, thus cooling demand and the overall economy. Higher interest rates are generally positive for the Mexican Peso (MXN) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken MXN.
Macroeconomic data releases are key to assess the state of the economy and can have an impact on the Mexican Peso (MXN) valuation. A strong Mexican economy, based on high economic growth, low unemployment and high confidence is good for MXN. Not only does it attract more foreign investment but it may encourage the Bank of Mexico (Banxico) to increase interest rates, particularly if this strength comes together with elevated inflation. However, if economic data is weak, MXN is likely to depreciate.
As an emerging-market currency, the Mexican Peso (MXN) tends to strive during risk-on periods, or when investors perceive that broader market risks are low and thus are eager to engage with investments that carry a higher risk. Conversely, MXN tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
- The NZD/JPY rose by nearly 0.90% to 89.80 on Friday.
- The RSI is in positive territory and rising, indicating buying pressure.
- The MACD is showing rising green bars, suggesting increasing bullish momentum.
In Friday's session, the NZD/JPY continued its climb, propelled by a 0.90% rise to 89.80. This upward trajectory indicates that the pair is gaining strength following the recent consolidation above the 89.00 level. The pair is also riding a substantial winning streak and exhibiting signs of technical strength, amplifying the possibility of further advancements.
Examining the Relative Strength Index (RSI), it is currently positioned at 54, suggesting that buying pressure is elevated and remains a driving force behind the pair's momentum. Additionally, the Moving Average Convergence Divergence (MACD) is painting a bullish picture, with rising green bars indicating increasing bullish momentum.
NZD/JPY daily chart
As for notable support and resistance levels, round support levels can be identified at 87.00, 86.50, and 86.00. Meanwhile, resistance levels can be found at 89.50, 90.00, and 90.50. The pair's breach past the 89.00 level has provided further confirmation of its bullish momentum, and sustained trading above this level could pave the way for a continued ascent..
- USD/JPY on track for a positive weekly close, yet still under key resistances, maintaining the downtrend.
- Resistance challenges include Kijun-Sen at 144.40 and Ichimoku Cloud; 50-DMA approaching a bearish cross with 100 and 200-DMAs.
- Buyer momentum builds with RSI rising, though remains below the critical 60 mark needed to overturn the downtrend.
- Potential upside targets 145.00 and the September 3 high at 147.21; a drop below 143.00 could test support at 142.04 (Tenkan-Sen).
The USD/JPY registers gain for back-to-back days, yet it remains shy of decisively cracking the 144.00 figure despite registering a weekly high of 144.49. At the time of writing, the pair exchanged hands at 143.96, up by 0.93%.
USD/JPY Price Forecast: Technical outlook
The pair is set to end the week positively, but the downtrend remains. The USD/JPY has failed to reclaim the Kijun-Sen at 144.46, and price action remains below the Ichimoku Cloud (Kumo).
In fact, the trend could accelerate as the 50-day moving average (DMA) crosses below the 100 and 200-DMAs, with the former closing the gap with the latter.
Momentum favors buyers as the Relative Strength Index (RSI) aims upward. However, it remains far from testing the 60 level, which is usually sought as a crucial break to change the USD/JPY ongoing downtrend.
Short-term, the USD/JPY could extend its gains, with the Kijun-Sen seen as first resistance at 144.40. A breach of the latter will expose the 145.00 figure, followed by the September 3 high at 147.21, followed by the 50-DMA at 147.56.
Conversely, if USD/JPY extends its losses past the 143.00 figure, the next support would be the Tenkan-Sen at 142.04.
USD/JPY Price Action – Daily Chart
Japanese Yen PRICE Today
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the strongest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.02% | -0.23% | 0.95% | 0.07% | 0.13% | -0.02% | 0.31% | |
| EUR | -0.02% | -0.26% | 0.95% | 0.03% | 0.10% | -0.03% | 0.29% | |
| GBP | 0.23% | 0.26% | 1.21% | 0.31% | 0.38% | 0.24% | 0.58% | |
| JPY | -0.95% | -0.95% | -1.21% | -0.86% | -0.82% | -0.96% | -0.61% | |
| CAD | -0.07% | -0.03% | -0.31% | 0.86% | 0.05% | -0.08% | 0.26% | |
| AUD | -0.13% | -0.10% | -0.38% | 0.82% | -0.05% | -0.12% | 0.22% | |
| NZD | 0.02% | 0.03% | -0.24% | 0.96% | 0.08% | 0.12% | 0.34% | |
| CHF | -0.31% | -0.29% | -0.58% | 0.61% | -0.26% | -0.22% | -0.34% |
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 Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
- The Dow Jones is inching back into record highs on Friday.
- The index continues to find play above 42,000 in the post-Fed glut.
- The Dow Jones stock index rose up to 100 points, or 0.25%, during Friday trading.
The Dow Jones Industrial Average (DJIA) edged back into the top end during the Friday market session, keeping bids north of 42,000 and sticking close to this week’s all-time record peaks. Equities pivoted firmly into the bullish side after the Federal Reserve (Fed) cut interest rates Wednesday, easing policy rates for the first time in four years and delivering an outsized 50 bps rate cut. The Dow Jones eased back toward the day's opening bids heading into the tail end of the week's final trading session, but intraday price action continues to play with the 42,000 handle.
Fed Chair Jerome Powell delivered a jumbo 50 bps rate cut on Wednesday, pivoting the narrative as a “re-calibration of policy” to shore up the US labor market rather than an outright snap reaction to decaying economic indicators. Markets, for their part, scooped up the Fed Chair’s bid full-parcel, bolstering equities across the board in a rate-cut splurge and sending the US Dollar Index (DXY) to a 14-month low.
With the Fed’s first rate cut in over four years finally out of the way, investors are now ready to pivot to the next immediate task: betting on whether the Fed’s November rate cut will be a 25 bps follow-up or another 50 bps slash. According to the CME’s FedWatch Tool, rate traders have fully priced in another rate cut from the Fed on November 7, with bets evenly split between 25 and 50 bps. Rate markets are so confident the Fed will deliver a follow-up rate cut in a little over six weeks there is currently a 0% chance priced in of the Fed holding rates steady in November.
Dow Jones news
A little under half of the Dow Jones equity index is underwater on Friday with losses being led by Intel (INTC), which has backslid -3.5% and tumbled below $20.50 per share. Intel recently announced multiple plans to spin the vessel back keel-side down, including axing around 10% of their global workforce, spinning off their foundry business into an independent subsidiary, and inking a fresh deal with Amazon to produce exclusive AI-based chipsets for Amazon Web Services. Despite all of the planned pivots, investors are still balking at the silicon company’s expected $25 to $27 billion in capital expenditures over the next year.
Dow Inc (DOW), the parent holding company of the Dow Chemical Company, is also chasing the bottom of the barrel on Friday despite a recent announcement that the manufacturing company was tapped to receive $100 million in subsidy funding from the Department of Energy to establish or expand US-based battery manufacturing.
Dow Jones price forecast
Despite an absolutely stellar performance on the charts recently, bidding pressure is beginning to show signs of exhaustion. The Dow Jones struggles to continue chalking in subsequent record highs with little to no pullback. The major equity index rose nearly 5.5% from the last swing low into the 40,000 major price handle, and price action is set to dig into the 42,000 level for the time being.
Dow Jones daily chart
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
- Upbeat Aussie Employment data strengthens case for RBA to maintain its current interest rate policy.
- Aussie shows little reaction to PBoC's decision to leave interest rates unchanged.
- Fed dovish bets might limit the downside.
The AUD/USD declined by 0.40% to 0.6790 in Friday's session, pressured by growing expectations of interest rate cuts by the Federal Reserve (Fed). The Fed's focus on preventing labor market deterioration has led traders to anticipate a 75-basis-point (bps) decrease in the remaining two Fed policy meetings. The Australian Dollar remained stable despite the People's Bank of China's (PBoC) decision to maintain interest rates unchanged.
Despite the mixed Australian economic outlook, the Reserve Bank of Australia's (RBA) hawkish stance on inflation has led to market expectations of a modest 25-basis-point rate cut in 2024. This signals a shift away from the previously anticipated more aggressive easing cycle due to the persistent inflationary pressures.
Daily digest market movers: Australian Dollar declines, Fed rate cut expectations limit downside
- Fed cut interest rates by 50 bps, signaling further cuts due to labor market concerns.
- Traders anticipate 75 bps of rate cuts in November and December, with a 43% probability of a 50 bps cut in November.
- Australian Dollar remains firm on strong employment data, dampening expectations for RBA rate cuts.
- Australia's August employment report showed a gain of 47.5K jobs, exceeding estimates and supporting the currency.
- China's PBoC left interest rates unchanged with no significant impact on AUD/USD.
AUD/USD technical outlook: Indicators turn flat but outlook remains positive
Around the 0.6800 mark, the AUD/USD indicators turned flat as buyers seem to be locking in gains from the previous session’s upwards movements. With the pair near yearly highs, it may be set to trade sideways in the next several sessions before the next upward leg. In the meantime, indicators turned flat but remain deep in positive terrain with the Relative Strength Index (RSI) near 62.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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