- The Australian Dollar strengthens as the RBA and Fed pursue divergent policy approaches.
- The RBA's Financial Stability Review indicates that the Australian financial system remains robust, with risks largely under control.
- China is set to inject CNY 1 trillion into its major banks.
The Australian Dollar (AUD) recouped recent losses against the US Dollar (USD) on Thursday, with the AUD/USD pair gaining support from contrasting monetary policy stances between the two central banks. Additionally, the commodity-linked Aussie Dollar received a boost as China, its largest trading partner, announced fresh stimulus measures to stimulate its economy.
On Tuesday, the Reserve Bank of Australia (RBA) held the Official Cash Rate (OCR) steady at 4.35%, supporting the Australian Dollar and strengthening the AUD/USD pair. RBA Governor Michele Bullock confirmed that rates will remain unchanged for the time being.
Meanwhile, the Federal Open Market Committee (FOMC) reduced the federal funds rate to a range of 4.75% to 5.0% with a significant 50 basis point cut, marking the Fed’s first rate reduction in over four years. According to the CME FedWatch Tool, markets are pricing in a roughly 50% probability of a further 75 basis point cut, potentially lowering the rate to 4.0-4.25% by year-end.
Traders now turn their attention to the upcoming release of the final US Gross Domestic Product (GDP) Annualized data for the second quarter (Q2), scheduled for later in the North American session.
Daily Digest Market Movers: Australian Dollar Rises Amid Central Bank Policy Divergence
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China is set to inject over CNY 1 trillion into its largest state-owned banks, which are facing challenges such as shrinking profit margins, declining earnings, and rising bad loans. This major capital infusion, the first of its kind since the 2008 global financial crisis, aims to stabilize the financial sector.
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According to the Reserve Bank of Australia's (RBA) September 2024 Financial Stability Review, the Australian financial system remains robust, with risks largely under control. However, concerns persist regarding financial stress in China and Beijing's limited response to these issues. Domestically, a small but growing number of Australian mortgage holders are falling behind on payments, though only 2% of owner-occupier borrowers are at serious risk of default.
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The Commonwealth Bank of Australia (CBA) anticipates that the RBA will likely revise its consumption forecasts downward in November. The RBA has already acknowledged downside risks to its current outlook. This potential revision, coupled with expectations of rising unemployment and trimmed mean inflation aligning with CBA forecasts, could lead to rate cuts by the RBA before year-end.
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Federal Reserve Governor Adriana Kugler expressed strong support for the Fed's recent 50 basis point rate cut, emphasizing that additional rate reductions may be necessary if inflation continues to cool, as anticipated.
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Australian Treasurer Jim Chalmers is scheduled to visit China this week to strengthen economic ties. Chalmers noted the importance of engaging with Chinese officials in Beijing, citing Australia’s vulnerability to economic fluctuations in China.
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JP Morgan advised investors to monitor commodities and bond yields, pointing to the positive market outlook following China's stimulus measures announced on Tuesday. The bank highlighted that China’s economic boost significantly reduces recession risks and is favorable for markets, though there are concerns about potential reinflation.
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Australia’s Monthly Consumer Price Index (CPI) rose by 2.7% year-over-year in August, slightly below both the previous 3.5% increase and the expected 2.8%.
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On Tuesday, People's Bank of China (PBOC) Governor Pan Gongsheng announced a 50 basis point cut to the Reserve Requirement Ratio (RRR). Gongsheng also outlined reductions to the seven-day repo rate, from 1.7% to 1.5%, and the down payment for second homes, from 25% to 15%. Additionally, on Thursday, the PBOC lowered the one-year Medium-term Lending Facility (MLF) rate from 2.30% to 2.0%, following a previous cut in July 2024 when the rate was reduced from 2.50%.
Technical Analysis: Australian Dollar Remains Below Ascending Channel Boundary Near 0.6850
The AUD/USD pair is trading around 0.6830 on Thursday. A review of the daily chart reveals that the pair has broken below the ascending channel, indicating a potential weakening of the bullish momentum. However, the 14-day Relative Strength Index (RSI) remains above the 50 level, signaling that bullish sentiment is still present.
In terms of resistance, the AUD/USD pair may test the lower boundary of the ascending channel at 0.6860. A successful return to the channel could reinforce the bullish bias, leading the pair toward the upper boundary near 0.6960.
On the downside, the pair could find support at the nine-day Exponential Moving Average (EMA) around the 0.6809 level. Further support lies at the key psychological level of 0.6700. A break below this could push the pair down toward its six-week low of 0.6622.
AUD/USD: Daily Chart
