Australian Dollar dips further amid mixed data with RBA decision in focus

AUD/USD extends losses, nearing the 0.7000 area, down from last week's 0.7068 high.
Mixed Australian data and upbeat Chinese manufacturing figures have failed to lift the Aussie.
On Tuesday, the RBA is widely expected to deliver the fifth interest rate hike of the year.

The Australian Dollar (AUD) is portraying one of the weakest performances among major currencies on Monday, and dips further against the US Dollar (USD), amid mixed Australian macroeconomic figures and bright Chinese manufacturing activity figures. The AUD/USD pair is trading at 0.7015 at the European session opening, nearing the bottom of the last two weeks’ trading range in the 0.7000 area.

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Australian macroeconomic data released earlier on Monday showed mixed results. The S&P Global Manufacturing Purchasing Managers' Index (PMI) accelerated its contraction, to 49.6 in October against expectations of a steady 49.7 reading, while, on the positive side, Building Permits bounced up 5.1% in September, well beyond the 2.1% expected by the market and reversing August’s 5.2% fall.

Apart from that, China’s RantingDog Manufacturing PMI revealed that the sector’s activity grew at a 52.0 pace in October, down from September's 52.1, but above the 51.6 reading expected by the market.

RBA meeting seen as pivotal as Aussie faces worsening inflation outlook

In Australia, the highlight of the week is the Reserve Bank of Australia's (RBA) monetary policy decision, due on Tuesday. Analysts at Rabobank note that the central bank is “widely tipped to deliver another 25bp rate rise,” which would “mark the fifth rate rise this year and take the cash rate target up to 4.85%.”

Rabobank also underscores the shift in the inflation narrative, pointing out that RBA Deputy Governor Hauser recently remarked that the Aussie inflation outlook has become “materially worse” and cautioned that, with “pending events in the Middle East this week, it might get even worse.”

In the US, the main focus is on Tuesday's midterm elections, which are expected to shift the balance of power in Congress and maybe even in the Senate. Such an outcome is likely to lead to a gridlock on the debt ceiling in 2027 and might also put a brake on data center building plans, at a time when clouds are casting over the AI sector.

Before that, the US ISM Services PMI is expected to show strong growth, to support the US economic exceptionalism rhetoric and strengthen the case for a Federal Reserve interest rate hike in December.

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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