Mixed Data: Australian Dollar Extends Losses as Focus Turns to RBA Decision

0.7000 comes into view as AUD/USD deepens its decline from last week's 0.7068 high.
The Aussie finds no support from mixed Australian releases or robust Chinese manufacturing data.
A fifth interest rate increase this year is widely anticipated from the RBA on Tuesday.

AUD/USD trades at 0.7015 as the European session opens. The pair is approaching the 0.7000 area, near the lower end of its trading range over the past two weeks. On Monday, the Australian Dollar (AUD) ranks among the weakest major currencies, extending its decline against the US Dollar (USD) despite strong Chinese manufacturing activity figures and mixed Australian macroeconomic data.

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

Monday's earlier Australian releases offered a mixed picture. A faster contraction was recorded in the S&P Global Manufacturing Purchasing Managers' Index (PMI), which fell to 49.6 in October rather than holding at 49.7 as expected. Building Permits provided a brighter signal: September's 5.1% rebound exceeded the market forecast of 2.1% and reversed August's 5.2% decline.

Meanwhile, China's RantingDog Manufacturing PMI showed activity expanding at a 52.0 pace in October. Although below September's 52.1, the reading surpassed market expectations of 51.6.

4.85% cash rate target in focus as RBA faces worsening inflation outlook

Tuesday's monetary policy decision from the Reserve Bank of Australia (RBA) is the week's key Australian event. 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%.”

A changing inflation narrative is also highlighted by Rabobank. The bank cites recent comments from RBA Deputy Governor Hauser that Australia's inflation outlook has turned “materially worse”. He also warned that, with “pending events in the Middle East this week, it might get even worse.”

Tuesday's midterm elections dominate the US agenda. They are expected to alter the balance of power in Congress and possibly even the Senate. With concerns already gathering over the AI sector, that outcome could also constrain data centre construction plans and is likely to trigger a debt-ceiling impasse in 2027.

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

RBA: Key Questions Answered

The Reserve Bank of Australia's Role and Its Influence on 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, with emergency meetings convened when necessary. Maintaining price stability, defined as inflation of 2-3%, is the RBA's core mandate. Its remit also includes “..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 policy instruments. Higher rates relative to those elsewhere strengthen the Australian Dollar (AUD), while lower relative rates have the opposite effect. Quantitative easing and quantitative tightening are additional tools available to the RBA.

Inflation Data and the Australian Dollar's Value

The easing of cross-border capital controls has changed how inflation affects currencies. Traditionally, inflation was viewed as a negative because it erodes the value of money. In modern markets, however, the effect has generally been the reverse. Moderately higher inflation tends to prompt central banks to raise interest rates, drawing capital from international investors looking for attractive returns. The resulting inflows lift demand for the domestic currency, which in Australia's case is the Australian Dollar.

Economic Indicators and Their Effect on the Australian Dollar

Investors generally favour stable, expanding economies over vulnerable, contracting ones. Macroeconomic releases indicate an economy's health and can therefore affect its currency: stronger capital inflows raise overall demand for the domestic currency and lift its value. For AUD, closely watched 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 for AUD.

Quantitative Easing (QE): The Process and Its Impact on the Australian Dollar

When interest rate cuts alone cannot restore credit flows through the economy, Quantitative Easing (QE) offers a policy tool for extreme conditions. Under QE, the Reserve Bank of Australia (RBA) creates Australian Dollars (AUD) to purchase assets from financial institutions, supplying much-needed liquidity. Those assets are usually government or corporate bonds. The typical effect of QE is a weaker AUD.

Quantitative Tightening (QT): The Process and Its Impact on the Australian Dollar

As the economy recovers and inflation begins to rise after QE, policy can shift to its opposite, Quantitative tightening (QT). Under QE, the Reserve Bank of Australia (RBA) injects liquidity into financial institutions by buying government and corporate bonds. Under QT, it ceases further asset purchases and no longer reinvests the principal returned as bonds in its existing portfolio mature. This would support the Australian Dollar, making it a bullish development for the currency.