Australian Dollar pares gains as US Dollar steadies, RBA hike bets ease

AUD/USD struggles to extend its recovery as the US Dollar stabilises.
Hot US inflation keeps markets leaning toward another Fed rate hike before year-end.
Weak employment figures temper RBA rate-hike bets, although further tightening remains possible.

AUD/USD trims some of its earlier gains on Friday as hawkish Federal Reserve (Fed) expectations cushion the downside in the US Dollar (USD) and US Treasury yields following the previous day’s pullback. At the time of writing, the pair trades around 0.6941 after reaching an intraday high of 0.6967, remaining on track for a weekly decline.

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The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.90 after touching an intraday low of 101.58, its lowest level in two weeks. Meanwhile, the benchmark 10-year US Treasury yield recovers toward 5.11% after falling to a three-week low near 5.04% on Thursday.

Treasury yields declined across the curve on Thursday, dragging the US Dollar away from the 18-month high of 102.94 reached earlier this week. The move came as concerns over AI valuations and debt-funded investments triggered a sell-off in equities and drove investors toward government bonds.

However, the Greenback finds some support as hotter-than-expected US inflation data and resilient consumer spending keep expectations tilted toward additional Fed rate hikes.

Despite the strong data, traders still expect the Fed to pause at its October 27-28 meeting. Expectations instead centre on December, with the CME FedWatch Tool showing roughly a 90% probability of a rate hike.

On the Australian side, Thursday’s weaker-than-expected labour market report tempered bets on another Reserve Bank of Australia (RBA) rate increase. Employment fell by 39.3K in September, compared with forecasts for a gain of 20K, while the Unemployment Rate stood at 4.7%.

The figures suggest that higher borrowing costs are weighing on hiring. Markets now expect the central bank to leave rates unchanged at its November 2-3 meeting after delivering four increases this year.

Still, September’s meeting minutes show that the RBA remains open to further tightening, with the Board prepared to raise rates again if needed to meet its inflation and employment goals.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

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.

How does inflation data impact the value of the Australian Dollar?

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.

How does economic data influence the value of the Australian 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.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

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.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

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.

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