Australian Dollar test monthly lows amid risk-off markets, high Oil prices
- AUD/USD resumes its immediate bearish trend and nears one-month lows at the 0.7100 area.
- Oil prices remain above $100, clouding the Australian economic outlook.
- The Minutes of the RBA hint at a rate pause in the coming meetings.
The Australian Dollar (AUD) resumes its downtrend against the US Dollar (USD) on Tuesday, and is trading a few pips above one-month lows in the 0.7100 area at the time of writing. Wanning hopes of a negotiated end to the Iran war and high Oil prices have dampened investors’ appetite for risk and are crushing the Aussie.
News about explosions in Iran’s Qeshm island reported by Iranian media is souring an already frail market sentiment. US President Donald Trump affirmed on Monday that serious negotiations with Tehran are going on, but the market is sceptical, as the parties are far apart in key issues, namely Iran's uranium enrichment activities.
Beyond that, a spokesperson of Qatar’s Foreign Ministry said that there are no arrangements for the export of energy products and confirmed that the traffic through the Strait of Hormuz has reduced to a trickle, compared to the average volumes seen before the war. This is boosting Oil prices well above the key $100 level, and clouding the outlook of Australia’s Crude-importing economy.
Earlier on Tuesday, the minutes of May’s Reserve Bank of Australia (RBA) monetary policy meeting hint at a pause, after three consecutive rate hikes to the current 4.35% level. Committee members agreed that the decision will give the board space to observe developments in the Middle East war, which suggests that the bank will stand pat in the next meeting. The Aussie retreated following the release.
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.