The Australian dollar traded higher against its U.S. counterpart after the decision of the Reserve Bank of Australia to cut interest rate.
The Reserve Bank of Australia eased its cash rate by 25 basis points to 1.5 percent effective last August 3 as the members of the bank perceived that the recent CPI data had confirmed that inflation was likely to remain low for some time.
As the market digested the conclusion of the August meeting, AUD/USD touched 0.7705, advancing 0.42 percent in the early trade. The pair rose with resistance at 0.77545 and support at 0.769545. Before the close of today’s session, AUD/USD might break the resistance and settle at 0.77411. For the next few trading sessions the pair will likely edge higher with a moving average of 0.76746.
The RBA believed that lower interest rates could drive stronger growth for the Australian economy. Technically, the GDP growth in the country was a little disappointing in the first two quarters of the year and may keep up for the rest of 2016. The RBA forecasted that GDP growth in Australia's major trading partners was expected to be up to ½ percentage point below its average rate in each year of the forecast period.
One of the contributing factors on the trend of the Aussie was the strong trade links of Australia to China. The economy of the mainland China has been struggling to recover. In light of the tight trade exposures of Australia with China, the Aussie will find it hard to attain solid gains if China reduces its trade of commodities such as iron ore and coal. Commodity currencies such as the Aussie and the loonie, depend on the trend of commodities.
In the first half of 2016 the GDP growth in China declined and it might continue to drop in the next quarter. This trend has started reflecting noticeable effects on other economies with large trade exposures to China.
Despite the forecasted adjustment of the terms of trade for Australia for this quarter, the Australian currency may still find the stability. Based on the written report of the RBA “Commodity prices overall had risen since the previous meeting and the Australian dollar exchange rate had appreciated a little since earlier in the year. Changes to expectations about central banks' policies continued to have an important influence on global exchange rate developments.”
Since the Aussie is considered to be of the most heavily traded currencies globally, any unsteady movement would cause trouble to the companies which are highly linked in trading.
Brexit and Central Banks
The Federal Reserve hasn’t changed its monetary policy, but, its door remained open for a rate hike probably in September or December. Meanwhile, the Bank of England had cut its cash rate and the European Bank might follow as well. The global financial market remains aloof from a massive recovery after the remarkable vote of Britain to leave the European Union.. Although the unemployment rate has declined in the euro region, the ECB still weighs in the relative effects of missing the inflation target.
Previously, the Australian dollar has been considered as a safe haven asset after Brexit. Investors have been seeking for alternative assets in times of financial instability. As the market players complete their respective transactions, the Aussie had a steady gain.
Another contributing stimulus to the growth of the Australian currency was the AAA credit rating. Based on the latest report of the Standard and Poor’, Australia received a negative outlook due to lack of forceful fiscal policy decisions which could lead to material budget deficits for several years.
However, the RBA said that “The downward revision to Standard & Poor's outlook for Australia's sovereign credit rating had no impact. Issuance of Australian Government Securities had been well received in July.” If the credit rating turns positive, the Australian dollar will likely move higher.
Despite the fact that higher interest rate would mean higher value for the currency, the inflation target of the central bank must be put into consideration as well as the economic and trade data. The RBA noted that the recent CPI data had confirmed that inflation was likely to remain low for some time. In case the inflation falls, then the Aussie would move higher. Adding to this, the greenback dropped to its seven-week lows against a basket of currencies, dovish comments from a Federal Reserve policy maker. This could momentarily support the uptrend of the Aussie.
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