Australian Dollar rebound fueled by rise in Crude Oil prices
- Australian Dollar rebounds after last week’s depressing finish.
- A rise in Crude Oil prices could be a factor as Oil is Australia’s second largest export.
- AUD/USD is challenging tough resistance at 0.6700 after US data misses expectations.
The Australian Dollar (AUD) recovers against the US Dollar (USD) on Monday, rising back up to a band of major Moving Averages in the 0.6700 zone. The Australian Dollar manages to shrug off downbeat data from its largest trading partner China, helped, perhaps, by a rise in Crude Oil prices, given Petroleum is the country’s second-largest export. The release of lower-than-expected US data in the form of the Chicago Purchasing Managers’ Index further fuels the rally.
AUD/USD trades in the lower 0.67s during the US session.
Australian Dollar news and market movers
- The Australian Dollar repairs Friday’s losses on Monday, rebounding back up to the confluence of support and resistance around 0.6700, on the back of a rally in Crude Oil prices and a flat US Dollar.
- Crude Oil is rising on the back of Saudi supply cuts and a drop in inventories, which now play a bigger role in influencing price than the US Dollar, due to differentiation away from a Dollar-centric market. Since the war in Ukraine and Russian sanctions, the Oil market has diversified away from the US Dollar into a variety of currencies, according to Reuters.
- The recovery is helped by the release of Chicago Purchasing Managers’ Index data, which comes out at 42.8 for July – below the 43.0 forecast but higher than the 41.0 of June.
- Key data releases for the US Dollar in the week ahead, include US labor market data, with the release of the ADP report on Wednesday, the usual weekly Initial Jobless Claims on Thursday, and the crucial Nonfarm Payrolls on Friday.
- The ISM gauges for the US manufacturing and services sectors will also be under the spotlight, given the data-dependence context highlighted by the Federal Reserve in its last meeting on July 26.
- China’s Non-Manufacturing PMI data came out lower than previously on Monday morning, registering 51.5 in July compared to 53.2 in June.
- Chinese Construction PMI showed the most concerning decline given the sector’s importance as an employer in the context of rising unemployment in China, falling to 51.2 in July from 65.6 in March.
- Manufacturing PMI, meanwhile, beat expectations of 49.2 but only by one point, coming out at 49.3, from June’s 49.0.
- The Chinese authorities released more policy guidelines but no concrete support measures after the data on Monday.
- At an official news conference, the Chinese state planner gave only vague promises to “study and formulate policies” though investors were left wanting more, according to a report by Reuters.
Australian Dollar technical analysis
AUD/USD is in a sideways trend on both the long and medium-term charts. The February high at 0.7158 is a key hurdle, which if vaulted, will alter the outlook to one that is more bullish longer term.
Likewise, the 0.6458 low established in June is a key level for bears, which if breached decisively, would give the chart a more bearish overtone from a longer-term perspective.
Australian Dollar vs US Dollar: Weekly Chart
The confluence of moving averages (MA) close to 0.6700, made up of all the major SMAs – the 50-week, 50-day and 100-day – remains a key support and resistance level. The exchange rate is currently challenging this level from below after temporarily breaking below it on Friday.
Australian Dollar vs US Dollar: Daily Chart
Whether the break was decisive is questionable – Friday’s candlestick is long and red but the close was not as close to the low as would be desirable for a really bearish signal. Nevertheless, it did cleanly breach the level.
With last week’s move down it is possible price may have completed a Measured Move pattern or three wave ABC correction (see labels on daily chart), where waves A and C are of similar length. If so, it is not surprising Monday is showing a reversal higher, although for how long the up move will last, it is impossible to tell.
On Monday price has recovered back up to the 0.6700 area and the cordon of MAs. It would require a decisive break above this level to reinvigorate short-term bullish hopes. Otherwise, the exchange rate has every chance of recapitulating and continuing last week’s bearish tone lower. A break below Friday’s 0.6623 low would revive the short-term downtrend.
Because the pair is in a sideways trend on the higher time-frame charts, the probabilities do not favor one scenario over another – nor is the Relative Strength Index (RSI) providing much insight on either timeframe.
A break below the 0.6623 lows, however, would probably indicate a continuation down to 0.6600 and the June lows, after which a continuation down to the May lows at 0.6460, could be quite possible.
In technical terms, a ‘decisive break’ consists of a long daily candlestick, which pierces cleanly above or below the critical level in question and then closes near to the high or low of the day. It can also mean three up or down days in a row that break cleanly above or below the level, with the final day closing near its high or low and a decent distance away from the level.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.