- The pair recovered after a weak opening near 0.6235.
- Investors shrugged off Trump’s tariff threats on China.
- Softer US Dollar data bolstered the Aussie rebound.
The Australian Dollar (AUD) bounces back strongly to near 0.6290 after a weak opening around 0.6235 on Monday. The AUD/USD pair attracts significant bids as investors shrug off fears linked to United States (US) President Donald Trump’s tariff threats on Chinese imports.
Markets will now focus on Jerome Powell’s testimony before the US Congress on Tuesday and inflation data from the US on Wednesday.
Daily digest market movers: Aussie recovers as risk sentiment shifts
- Over the weekend, President Trump threatened to raise 25% tariffs on steel and aluminum imports globally, but market participants now view these threats as a negotiation tactic.
- Accelerated Chinese Consumer Price Index (CPI) data for January surprised markets, with year-on-year growth at 0.5% (versus the expected 0.4%) and a monthly increase of 0.7%, reinforcing the view of the AUD as a proxy for the Chinese Yuan given Australia’s trade ties.
- Trump’s imposition of a 25% duty on imports from Canada and Mexico was delayed by a month, offering temporary relief and prompting a quick sell-off in the US Dollar. Meanwhile, a 10% tariff on Chinese imports remains, sparking fears of retaliatory measures from Beijing.
- Recent Q4 Consumer Price Index (CPI) figures in Australia show headline inflation at 2.5% YoY, down from 2.8%, and the trimmed mean CPI fell to a three-year low of 3.2%. These softer inflation figures have raised expectations of a 25 basis point rate cut by the Reserve Bank of Australia (RBA) in February which acts as a roof for the pair’s upside.
- Dovish hints on Tuesday’s testimony from Jerome Powell or weak CPI data from the US on Wednesday might add momentum to the pair.
AUD/USD technical outlook: Bulls build momentum above 20-day SMA
The AUD/USD pair rose by 0.67% to 0.6290 on Monday, rebounding from a weak opening near 0.6235. Technical indicators suggest a promising short-term recovery: the pair surged past the 20-day Simple Moving Average (SMA) at approximately 0.6230, establishing a key support level.
The Relative Strength Index (RSI) is at 58, indicating growing bullish momentum, while the MACD histogram prints flat green bars, reflecting a gradual build in upward pressure.
Although the market remains cautious due to lingering tariff uncertainties and mixed US data, the recent rebound suggests that the Aussie could continue to benefit if key resistance levels, particularly around 0.6300 and 0.6400, are breached.
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.
