Australian dollar moves sideways amid mixed outlook ahead of US CPI

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  • Australian dollar gained on risk appetite ahead of US CPI data.
  • The Australian currency market went down on Monday, despite record gains in the US markets on Friday.
  • Markets are closed in China due to Lunar New Year holidays.
  • US CPI in January is expected to decline year-on-year and month-on-month to 3.0% and 0.2%, respectively.
  • US dollar declines despite steady US treasury yields

The Australian dollar (AUD) attempted to consolidate its recent gains during Monday’s quiet session. Despite the stability of US Treasury yields, the weakening of the US Dollar (USD) weighs on the AUD/USD pair. On the other hand, an increase in new Chinese debt could provide additional support to the Australian dollar. However, concerns about deflation in China are weighing on sentiment, which could act as a headwind for the AUD/USD pair.

The Australian dollar may face some headwinds as the Australian currency market shrugged off record gains in the United States (US) markets on Friday and turned lower in early trading on Monday. Traders are taking a cautious approach in anticipation of important US inflation data that could impact interest rate expectations.

The DXY Dollar Index is seen declining amid mixed sentiment prevailing in the market, especially ahead of the release of Consumer Price Index (CPI) data on Tuesday. Dallas Federal Reserve (Fed) President Lauri Logan said on Friday that there is no immediate need to reduce interest rates at the moment. Logan acknowledged “huge progress” in controlling inflation, but stressed the need for additional evidence to ensure the sustainability of these advances.

Daily Market Summary: Australian dollar gains on risk-off sentiment

  • The Australian Industry AIG Index stood at -27.3 in December, compared to -22.4 earlier.
  • Australian retail sales improved in the fourth quarter with quarter-on-quarter growth of 0.3%, compared with previous growth of 0.2%.
  • The Commonwealth Bank of Australia (CBA) forecasts a 75 basis point cut in the benchmark interest rate by 2024, with the initial cut expected to take place in September.
  • China’s consumer price index (CPI) rose 0.3% month-on-month in January, less than the expected 0.4%. However, this is an improvement from the previous reading of 0.1%.
  • China’s annual CPI fell 0.8%, more than the forecast decline of 0.5% and the previous 0.3% decline.
  • China’s producer price index fell 2.5% year-on-year, less than the expected decline of 2.6%.
  • Initial claims for jobless benefits in the United States fell to 218,000 in the week ended Feb. 2, compared with 227,000 the previous week, above the expected figure of 220,000.
  • In the United States, applications for continued unemployment benefits fell to 1,871,000 in the week ending January 26. The market forecast was for a decline to 1,878,000 from the previous reading of 10,894,000.
  • The 4-week average of initial jobless claims in the US rose to 212,250 in the week ended February 2, from 208,500 earlier.
  • The Atlanta Fed wage growth index fell to 5.0% in January from 5.2% reported in December. This represents the lowest growth rate since December 2021, which was 4.5%.
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Technical Analysis: Australian Dollar hovering around 0.6520 area ahead of 9-day EMA

The Australian dollar traded around 0.6520 against the US dollar on Monday, below the immediate resistance at the 9-day EMA 0.6530 and the key level at 0.6550. A break above this key level could trigger a new bullish move for the AUD/USD pair, with key targets including the 23.6% Fibonacci retracement level at 0.6563, followed by psychological resistance at 0.6600 level. On the downside, key support is expected at the psychological level of 0.6500, followed by last week’s low of 0.6468, before reaching the key support level of 0.6450.

AUD/USD Daily Chart

Australian Dollar FAQ

One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Since Australia is a resource-rich country, another major factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and trade balance. Market sentiment, i.e., whether investors bet on risky assets (risk-on) or seek safe havens (risk-off), is also a factor, with risk-on being positive for the AUD.

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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 affects the level of interest rates in the economy as a whole. The main objective 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 relatively low interest rates do the opposite. The RBA may also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter positive for the AUD.

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China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian dollar (AUD). When the Chinese economy is performing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and increases its value. The opposite happens when the Chinese economy does not grow as fast as expected. Therefore, a positive or negative surprise in Chinese growth data usually has a direct impact on the Australian dollar.

Iron ore is Australia’s largest export, worth $118 billion per year as of 2021, with China as its main destination. Therefore, the price of iron ore could be a driver of the Australian dollar. Typically, if the price of iron ore increases, the AUD also increases, increasing aggregate demand for the currency. The opposite happens when the price of iron ore falls. The possibility of a positive trade balance for Australia also increases as a result of higher iron ore prices, which is also positive for the AUD.

The trade balance, which is the difference between what a country earns from its exports and what it pays for its imports, is another factor that can affect the value of the Australian dollar. If Australia produces highly demanded exports, the value of its currency will be derived entirely from the additional demand created by foreign buyers willing to buy its exports, versus what it spends on buying imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect occurring if the trade balance is negative.

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