AUD/USD extends rally as buyers’ eye 0.6700 ahead of Aussie’s job data
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Christian Borjon Valencia
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AUD/USD extends rally as buyers’ eye 0.6700 ahead of Aussie’s job data

  • Australian Dollar gained over 1% against the US Dollar, on Wednesday.
  • US April CPI rose by 0.3% MoM, core CPI dipped as expected.
  • Australian wages grew less than estimated, hinting at easing inflationary pressures.

The Australian Dollar surged more than 1% against the US Dollar on Wednesday after data showed that consumer inflation moderated in April, with the underlying Consumer Price Index (CPI) edging lower for the first time in six months. As Thursday’s Asian session begins, the AUD/USD trades at 0.6695, virtually unchanged.

AUD/USD climbs as inflation moderates in both Australia and the US

Inflation in the US began to show signs of cooling after posting consecutive readings of stalling, which sparked a change of tone amongst Federal Reserve officials.

The US Department of Labor revealed that April’s CPI rose by 0.3% MoM, down from March’s 0.4% and estimates. The so-called core CPI, which excludes volatile items like food and energy, dipped from 0.4% to 0.3% as expected.

At the same time, Retail Sales were unchanged in April, at 0% MoM, missing projections of a 0.6% increase as higher borrowing costs and mounting debt, weighed on American consumers.

Minneapolis Fed President Neel Kashkari stated that, given the higher government debt, achieving the 2% inflation target might necessitate higher borrowing costs in the near term. He expressed surprise at the resilience of consumer spending and highlighted the critical question of "how restrictive monetary policy is.”

On the Aussie’s front, wages increased less than estimated in Q1 2024, hinting that inflationary pressures could be easing. The Wage Price Index (WPI) came at 0.8% QoQ, down from 1% in Q4 2023, and missed estimates of 0.9%.

Ahead in the economic docket is Australia’s Employment report. Estimates suggest the economy added 23.7K employees to the workforce after laying off 6.6K in March. The unemployment rate is forecast to increase to 3.9% after ticking higher to 3.8% previously.

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AUD/USD Price Analysis: Technical outlook

The daily chart suggests that the AUD/USD uptrend will continue, but buyers must decisively surpass the 0.6700 figure. Momentum is on their side, as the Relative Strength Index (RSI) aims up, shy of turning overbought.

That said, once 0.6700 is cleared, the next stop would be the psychological 0.6750 figure, followed by the 0.6800 mark. Conversely, if AUD/USD stays below 0.6700, look for a pullback to the May 3 high at 0.6647, ahead of diving to 0.6600.

Australian Dollar FAQs

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.