- The Australian Dollar strengthens amid a divergent policy outlook between the RBA and the Fed.
- China's Caixin Manufacturing PMI dropped to 49.3 in September, down from 50.4 in August.
- Traders are likely to turn their attention to Fed Chair Jerome Powell's speech on Monday.
The Australian Dollar (AUD) extends its winning streak for the third consecutive session on Monday, staying strong despite mixed PMI data from China, Australia’s largest trading partner. Rising expectations of US Federal Reserve (Fed) policy easing in November are weakening the US Dollar, providing support for the AUD/USD pair.
China's Caixin Manufacturing PMI dropped to 49.3 in September, signaling contraction from August's 50.4. Similarly, the Caixin Services PMI fell significantly to 50.3 from 51.6 in August, indicating a slowdown in the services sector.
The US Dollar has come under pressure following Friday’s US Core Personal Consumption Expenditures (PCE) Price Index data for August. The index rose by just 0.1% MoM, below the anticipated 0.2%, aligning with the Fed's view that inflation is cooling in the US economy. This has strengthened expectations for an aggressive rate-cutting cycle by the Fed.
According to the CME FedWatch Tool, markets are assigning a 42.9% probability of a 25-basis-point rate cut by the Fed in November, with the likelihood of a 50-basis-point cut rising to 57.1%, up from 50.4% a week ago.
Daily Digest Market Movers: Australian Dollar Gains on RBA’s Hawkish Stance
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China’s NBS Manufacturing PMI improved to 49.8 in September, up from 49.1 in August and exceeding the market consensus of 49.5. However, the Non-Manufacturing PMI dropped to 50.0, down from 50.3 in August and below the expected 50.4, reflecting a slowdown in the services sector.
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The Reserve Bank of Australia's (RBA) hawkish stance continues to boost the Australian Dollar. The RBA held its cash rate steady at 4.35% for the seventh consecutive meeting but emphasized the need to maintain restrictive policy to ensure inflation cools.
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St. Louis Federal Reserve President Alberto Musalem, in a Financial Times interview, suggested that the Fed should begin cutting interest rates "gradually" following the larger-than-usual half-point reduction in September. He also acknowledged the risk of a greater-than-expected economic downturn, which could necessitate a faster pace of rate cuts.
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During his visit to China, Australian Treasurer Jim Chalmers engaged in candid discussions with the National Development and Reform Commission (NDRC). Chalmers pointed to China's economic slowdown as a key factor in weaker global growth but welcomed the country's new stimulus measures as a "very positive development."
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US GDP grew at an annualized rate of 3.0% in the second quarter, in line with previous estimates from the US Bureau of Economic Analysis (BEA). Meanwhile, the GDP Price Index rose by 2.5% during the same period.
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China plans to inject over CNY 1 trillion into its largest state banks, which are grappling with shrinking margins, declining profits, and rising bad loans. This would be the most significant capital injection since the 2008 global financial crisis.
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According to the Reserve Bank of Australia's Financial Stability Review in September 2024, the Australian financial system remains resilient, though risks persist, particularly in China’s financial sector. Domestically, there is growing concern about a small but increasing number of Australian home borrowers falling behind on payments, although serious risks remain low, affecting only about 2% of owner-occupier borrowers.
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The Commonwealth Bank of Australia (CBA) expects the RBA to revise its consumption forecasts downward in November, with the RBA already recognizing downside risks. CBA anticipates higher unemployment and trimmed mean inflation, which could prompt the RBA to consider rate cuts by the end of the year.
Technical Analysis: Australian Dollar Holds Above 0.6920, Lower Boundary of Ascending Channel
The AUD/USD pair trades near 0.6920 on Monday, hovering along the lower boundary of an ascending channel on the daily chart. Staying above this boundary suggests continued bullish momentum for the pair. Additionally, the 14-day Relative Strength Index (RSI) remains above the 50 level, reinforcing the bullish sentiment.
On the upside, the AUD/USD pair could target the upper boundary of the ascending channel, near the 0.7000 level. A decisive break above this resistance could open the door for further bullish potential. However, failure to break this level may trigger a pullback within the channel.
On the downside, a break below the lower boundary of the ascending channel could weaken the bullish outlook, pushing the pair towards the nine-day Exponential Moving Average (EMA) at 0.6853. A further break below this level could introduce bearish momentum, potentially leading the pair to test its six-week low near 0.6622.
AUD/USD: Daily Chart
