AUD/USD holds near 0.6600 as Greenback weakens on US shutdown and soft PMI data
- AUD/USD holds modest gains around 0.6600, set for its first weekly gain in three weeks.
- Greenback under pressure as the US government shutdown drags into a third day, dampening sentiment.
- S&P Global Services PMI shows cooling momentum on both sides of the Pacific.
The Australian Dollar (AUD) holds modest gains versus the US Dollar (USD) on Friday, supported by a weaker Greenback as the United States (US) government shutdown drags on and the ISM Services Purchasing Managers Index (PMI) softens.
At the time of writing, the pair is changing hands near 0.6600, trimming earlier gains, still on track for its first weekly advance in three weeks. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is hovering near 97.72, just above the weekly low of 97.46.
Earlier in the day, data from the Institute for Supply Management (ISM) showed the Services PMI eased to 50 in September from 52 in August, missing the consensus forecast of 51.7. The details revealed that the New Orders Index fell to 50.4 from 56, while the Employment Index edged up to 47.2 from 46.5.
Separate data from S&P Global also pointed to cooling momentum in the services sector on both sides of the Pacific. In the US, the S&P Global Services PMI eased to 54.2 from 54.5, marking the second consecutive monthly slowdown as softer domestic demand tempered gains in export orders. In Australia, the S&P Global Services PMI slipped to 52.4 in September from 55.8 in August, still signaling expansion but at the slowest pace since June, with softer new business growth partly offset by stronger job creation.
The softer services data reinforced expectations that the Federal Reserve (Fed) will proceed with further monetary policy easing this year, with markets pricing in a near-certain 25 basis-point (bps) interest cut later this month and about an 85% chance of another cut in December, according to the CME FedWatch tool.
By contrast, the Reserve Bank of Australia (RBA) struck a more cautious note at its September meeting, keeping the cash rate steady at 3.60%. Policymakers have signaled that future moves will depend on incoming data, particularly on inflation and wages, suggesting a slower easing path compared with the Fed. Interest-rate swaps now imply about a 36% probability of a 25-bps cut in November, down from around 55% before the central bank’s September policy decision, and roughly a 50% chance of easing in December, according to Reuters.
(This story was corrected on October 3 at 18:58 GMT to say that the ISM Services Employment Index edged up to 47.2, not down)
RBA FAQs
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.
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.
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.
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.
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.