Australian Dollar Holds Gains Amid Hawkish RBA and US Election Uncertainty
The Australian Dollar (AUD) has managed to hold its ground following a hawkish stance by the Reserve Bank of Australia (RBA) and amid global market shifts due to the US presidential election. While the RBA kept interest rates unchanged, Australia’s economic indicators showed steady improvement, supporting the AUD’s resilience. This article dives into the main factors influencing the AUD/USD pair, from the RBA’s latest decisions to US political and economic developments.
RBA Holds Steady on Interest Rates but Signals Hawkish Tone
Decision to Maintain Rates and Economic Conditions
The Reserve Bank of Australia (RBA) decided to keep the Official Cash Rate (OCR) steady at 4.35% for November, marking the eighth consecutive pause in its interest rate changes. This decision aligns with the central bank’s cautious stance amidst ongoing inflationary risks and a resilient domestic economy. Governor Michele Bullock expressed the RBA’s intention to maintain restrictive rates for the time being, acknowledging that inflationary pressures are yet to subside.
The Impact of Inflation and Wage Growth
The RBA’s hawkish stance reflects its concerns over inflation, even though wage growth in Australia has shown signs of easing. A tight labor market still influences inflation, necessitating high interest rates to manage it. As wage pressures soften, the RBA appears to be on a path of carefully balancing growth with inflationary control, which has provided a supportive foundation for the Australian Dollar.
AUD/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
Australian Economic Indicators: A Mixed Bag
Improvement in Services and Composite PMIs
Australia’s Judo Bank reported a slight increase in the Services and Composite Purchasing Managers Index (PMI) for October, with the Services PMI rising to 51.0 from 50.6. This was above market expectations and signaled mild growth in the services sector. The Composite PMI also rose to 50.2, crossing the 50 threshold, indicating an expanding economy.
Inflation Trends and Job Market Conditions
Australia’s TD-MI Inflation Gauge reflected a 0.3% increase month-over-month in October, marking the highest rise since July. This data adds to the inflationary landscape the RBA is navigating. Additionally, ANZ reported a 0.3% rise in job advertisements in October, although this is a notable deceleration from the previous month’s revised 2.3% increase. Despite slower growth, this marks a second month of job advertisement gains, hinting at a steady, though cautious, labor market recovery.
Producer Price Index Insights
Australia’s Producer Price Index (PPI) saw a quarterly increase of 0.9% for Q3, surpassing market forecasts and reflecting consistent producer inflation. This data underscores the persistent inflationary challenges facing the RBA, as businesses continue to deal with higher costs that are eventually passed on to consumers.
China-Australia Relations: Trade Developments and Economic Impact
Trade Talks and Business Environment
China’s Commerce Minister Wang Wentao met with Australia’s Trade Minister Don Farrell, discussing continued efforts to enhance the business environment for Chinese companies operating in Australia. With both countries seeking stable trade relations, this collaboration positively impacts the Australian Dollar, as improved trade dynamics with China remain critical for Australia’s economic stability.
Chinese Economic Indicators and Their Repercussions
In October, the Caixin China Services PMI rose to 52.0, indicating a recovery in China’s services sector. Since China is Australia’s largest trading partner, improvements in the Chinese economy provide a supportive environment for Australian exports, which in turn bolster the AUD.
US Election Uncertainty Weighs on the US Dollar
Presidential Election and Its Market Impact
As the US prepares for a close presidential election, market uncertainty has cast a shadow over the US Dollar (USD). Polls suggest a tight race, with former President Donald Trump and Vice President Kamala Harris campaigning vigorously in key swing states like Pennsylvania. The high stakes have led to increased market volatility, impacting the USD and indirectly strengthening the AUD.
Anticipated Legal Challenges and Market Reactions
The US election might face delays in finalizing results, with Trump signaling the possibility of contesting unfavorable outcomes. This potential legal conflict could lead to prolonged market uncertainty, weakening the USD as investors seek safer assets.
US Federal Reserve’s Policy Decision: Key Market Focus
Rate Cut Expectations and Economic Implications
The Federal Reserve’s upcoming policy decision is set to impact market dynamics significantly. The CME FedWatch Tool shows a 99.5% probability of a 25 basis point rate cut in November, following recent inflation data. If the Fed indeed lowers rates, the USD could face further pressure, indirectly supporting the AUD.
October Nonfarm Payrolls and Unemployment Rate
October’s Nonfarm Payrolls increased by just 12,000, a substantial drop from the previous month’s revised 223,000. This figure fell short of expectations, reinforcing a sense of economic deceleration. The Unemployment Rate, however, remained stable at 4.1%, aligning with forecasts. These labor market indicators will likely influence the Fed’s decisions in the short term.
Technical Analysis of AUD/USD
Testing Key Moving Averages
As of Tuesday, the AUD/USD pair traded near 0.6590, with the daily chart indicating a potential slowdown in the bearish trend. The pair tested the nine-day Exponential Moving Average (EMA) at 0.6596, a significant resistance level. Breaking above this level could shift the momentum slightly upward.
Resistance Levels to Watch
The AUD/USD pair encounters immediate resistance at the nine-day EMA of 0.6596, followed by the 14-day EMA at 0.6618. If the pair breaches these levels, it could aim for the psychological resistance level at 0.6700. Moving beyond this threshold may signal a stronger upward trend.
Key Support Levels
On the downside, immediate support lies at the three-month low of 0.6536. A breach of this level could push the pair further down toward the key support level at 0.6500. Maintaining above these support points will be crucial for AUD resilience.
Balancing Forces Shaping the Australian Dollar
The AUD/USD pair remains influenced by a complex interplay of domestic economic data, RBA’s hawkish outlook, US election uncertainty, and shifting global market dynamics. The Reserve Bank of Australia’s decision to hold interest rates steady while emphasizing inflation control has provided a stabilizing effect on the AUD, which is further supported by improving economic indicators. However, risks from US election-related uncertainties and the potential Fed rate cut keep the currency markets volatile.
For traders, watching the AUD/USD pair’s movements around key technical levels like the nine-day and 14-day EMAs will provide insights into short-term momentum shifts. As the US election unfolds and the Fed’s policy decision nears, any major developments could either bolster or weaken the AUD, depending on how these global events interact with Australia’s economic landscape.
