The Australian Dollar (AUD) experienced its sixth consecutive session of losses on Monday, driven by an increased risk-off sentiment in the market. Despite this downturn, the currency’s downside may be limited by strong employment data, indicating a tight labor market and raising the possibility of an interest rate hike by the Reserve Bank of Australia (RBA). Investors are eagerly awaiting the release of Australian manufacturing and services PMI figures this week to better understand the economy’s health.
In a move that could impact the Australian market, the People’s Bank of China (PBoC) reduced its one- and five-year loan prime rates by ten basis points to 3.35% and 3.85%, respectively. Given the close trade ties between China and Australia, fluctuations in the Chinese economy can significantly affect Australian markets.
Conversely, the weakening US Dollar (USD) has provided some support for the AUD/USD pair. The Greenback is under pressure as expectations for a Federal Reserve (Fed) rate cut in September grow, compounded by ongoing concerns about the US labor market’s fragility. The CME Group’s FedWatch Tool indicates a 91.7% probability of a 25-basis point rate cut at the upcoming September Fed meeting, a slight increase from the previous week’s 90.3%.
In a surprising political development, Reuters reported that President Joe Biden announced he would not seek re-election, creating new dynamics in the US electoral landscape and adding further uncertainty to the markets.
Daily Digest Market Movers:
RBA’s Hawkish Stance: The Australian Dollar shows signs of improvement due to hawkish sentiments surrounding the RBA. Recent data from the Australian Bureau of Statistics revealed an increase in Employment Change by 50,200 in June, significantly surpassing the forecasted 20,000. This robust employment growth suggests resilient demand and persistent cost pressures, making the August RBA meeting crucial for potential rate decisions. Sean Langcake of Oxford Economics Australia commented on the likelihood of the RBA maintaining its course, despite the live possibility of rate adjustments in August.
China’s Regulatory Changes: China’s $715 billion hedge fund industry is preparing for heightened regulatory pressures set to take effect next month. These new rules will require funds to meet higher asset thresholds and adhere to stricter investment and marketing regulations, prompting some investment firms to seek additional capital.
US Economic Insights: Federal Reserve Bank of New York President John Williams highlighted that long-term trends leading to declines in neutral interest rates pre-pandemic still prevail. He referenced his estimates for neutral rates (r-star) in the US, Canada, and the Euro area, which remain consistent with pre-pandemic levels. Additionally, Fed Chair Powell’s recent comments suggested growing confidence that US inflation is on track to meet targets, hinting at imminent interest rate cuts.
Global Inflation Trends: Westpac’s analysis on inflation indicates that Australia is likely to follow a broad disinflation trend similar to other nations, driven by comparable economic shocks.
Technical Analysis:
The Australian Dollar is trading around 0.6690 against the US Dollar as of Monday. Technical analysis shows the AUD/USD pair is depreciating within a descending channel, indicating a bearish trend. The 14-day Relative Strength Index (RSI) is slightly below the 50 level, further suggesting a bearish outlook.
The pair might test the lower boundary of the descending channel around the 0.6640 level. A drop below this threshold could push the pair towards the throwback support near 0.6590. On the upside, immediate resistance is seen at the psychological level of 0.6700, followed by the nine-day Exponential Moving Average (EMA) at 0.6715. Breaking above the latter could lead the AUD/USD pair to test the upper boundary of the descending channel around 0.6740.
In summary, while the Australian Dollar faces pressure from various global and domestic factors, strong employment data and potential RBA actions could provide a buffer. Investors remain vigilant, anticipating key economic indicators and central bank decisions in the coming weeks.
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