Australian Dollar resumes advance as US Dollar loses post-NFP momentum
- AUD/USD resumes its advance after quickly reversing its NFP-driven decline.
- Strong US employment data lift Fed interest rate hike expectations, but the US Dollar struggles to hold its gains.
- Hawkish RBA expectations keep the Australian Dollar supported.
AUD/USD resumes its advance on Friday after a brief bout of weakness following a stronger-than-expected United States (US) employment report. The pair initially fell to 0.7173 before reversing as the US Dollar (USD) struggled to capitalize on the upbeat figures, even as they strengthened expectations of a Federal Reserve (Fed) rate hike at the September 15-16 meeting. At the time of writing, AUD/USD trades around 0.7206, near levels last seen on May 15.
The Australian Dollar (AUD) remains underpinned by the Reserve Bank of Australia’s (RBA) hawkish stance.
US Nonfarm Payrolls (NFP) increased by 162K in August, well above market expectations for a 56K gain. July’s reading was revised higher to 21K from the previously reported 23K decline, while the Unemployment Rate held steady at 4.1%, as expected. US Bureau of Labor Statistics
The US Dollar jumped after the employment report but quickly lost momentum. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.10 after climbing to 99.36.
According to the CME FedWatch Tool, markets now price in around a 60% chance of an increase, up from 50% before the NFP release. Uncertainty over the Fed’s policy path persists, with the outcome of the September meeting likely to hinge on next week’s US Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Recent inflation data points to some moderation, although elevated Oil prices due to the war in the Middle East could complicate the inflation outlook.
Cleveland Fed President Beth Hammack said in a LinkedIn post that policy is not restrictive, adding that “inflation is too high — and the longer it stays above our objective, the harder it will be to bring it back down.”
The Australian Dollar remains supported by the RBA’s hawkish stance, with traders anticipating another rate increase later this month as inflation sits above the central bank’s 2%-3% target band, while resilient second-quarter growth gives policymakers room to tighten further.
Looking ahead, Australia’s economic calendar is relatively light next week, with September Consumer Inflation Expectations the only major domestic release. Chinese inflation and trade data will also draw attention given Australia’s close trade ties with China.
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.
