Australian Dollar extends losses amid mixed data as focus turns to RBA decision

Selling pressure takes AUD/USD towards 0.7000, extending its retreat from last week's high of 0.7068.
The Aussie finds no support from mixed Australian economic releases or stronger-than-expected Chinese manufacturing data.
Expectations are widespread that Tuesday's RBA decision will bring the year's fifth interest rate increase.

The Australian Dollar (AUD) ranks among Monday's weakest major currencies, losing further ground against the US Dollar (USD) despite upbeat Chinese manufacturing figures and mixed domestic economic releases. At the opening of the European session, AUD/USD trades at 0.7015, moving towards the lower end of its trading range over the past two weeks, around 0.7000.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Monday's Australian economic releases painted a mixed picture. Contraction in manufacturing deepened, with the S&P Global Manufacturing Purchasing Managers' Index (PMI) slipping to 49.6 in October rather than holding at 49.7 as expected. Building Permits offered a brighter signal, rebounding 5.1% in September to reverse August's 5.2% decline and comfortably exceed the market forecast of 2.1%.

Meanwhile, China's RantingDog Manufacturing PMI put October's pace of expansion at 52.0 , easing from 52.1 in September but exceeding market expectations of 51.6.

Why is the RBA decision crucial for the Aussie as the inflation outlook worsens?

Tuesday's monetary policy announcement from the Reserve Bank of Australia (RBA) is the main domestic event this week. According to Rabobank analysts, the central bank is “widely tipped to deliver another 25bp rate rise,” a move that would “mark the fifth rate rise this year and take the cash rate target up to 4.85%.”

The changing inflation picture is another concern highlighted by Rabobank. The bank cites recent comments from RBA Deputy Governor Hauser, who described Australia's inflation outlook as “materially worse” and warned that, with “pending events in the Middle East this week, it might get even worse.”

Attention in the US centres on Tuesday's midterm elections, with expectations of a change in the balance of power in Congress and possibly even the Senate. That outcome would be likely to create a deadlock over the debt ceiling in 2027. It could also slow plans to build data centres as uncertainty grows over the AI sector.

Ahead of the elections, the US ISM Services PMI is expected to indicate robust growth. Such a reading would reinforce the narrative of US economic exceptionalism and bolster the case for a December interest rate increase by the Federal Reserve.

Common questions about the RBA

What role does the Reserve Bank of Australia play, and how does it affect the Australian Dollar?

Australia's interest rates and monetary policy are determined by the Reserve Bank of Australia (RBA). Its board of governors takes decisions at 11 scheduled meetings each year, alongside emergency meetings convened when necessary. Maintaining price stability, defined as inflation of 2-3%, is the RBA's primary mandate. Its remit is also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Interest rate increases and cuts are its principal means of meeting these objectives. Higher relative interest rates strengthen the Australian Dollar (AUD), while lower rates have the opposite effect. Quantitative easing and quantitative tightening are also part of the RBA's toolkit.

How do inflation figures affect the Australian Dollar's value?

Inflation was traditionally regarded as a drag on currencies because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has reversed that relationship. A moderate rise in inflation now tends to prompt central banks to increase interest rates. Higher rates attract capital from global investors looking for rewarding places to hold their money, lifting demand for the domestic currency. In Australia's case, that currency is the Australian Dollar.

Why do economic releases matter for the Australian Dollar?

A currency's value can respond to macroeconomic releases because these indicate the state of the economy. Investors favour stable, expanding economies over vulnerable, contracting ones when allocating capital. Increased capital inflows lift overall demand for the domestic currency and its value. For the AUD, influential indicators include GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys. Economic strength may also prompt the Reserve Bank of Australia to raise interest rates, providing further support to the AUD.

How does Quantitative Easing (QE) work, and what does it mean for the Australian Dollar?

When interest rate cuts alone cannot restore credit flows in the economy, Quantitative Easing (QE) offers a tool for use in extreme circumstances. Under QE, the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) to purchase assets from financial institutions, usually government or corporate bonds. These purchases supply the institutions with much-needed liquidity. The usual effect of QE is a weaker AUD.

How does Quantitative tightening (QT) work, and what does it mean for the Australian Dollar?

As the reverse of QE, Quantitative tightening (QT) follows a period of easing once economic recovery is under way and inflation begins to rise. During QE, the Reserve Bank of Australia (RBA) supplies liquidity to financial institutions by purchasing government and corporate bonds. Under QT, it halts further asset purchases and no longer reinvests principal repayments from maturing bonds in its portfolio. This would support the Australian Dollar, making it a bullish development for the currency.