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Australian Dollar continues to struggle following Australian labor market results

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  • AUD/USD experiences an extended decline following release of labor market figures from Australia during Asian session.
  • Federal Reserve's projection of higher interest rates continues to favor USD.
  • Despite clearing some losses, US Treasury yields remain down by more than 2%.

The Australian Dollar (AUD) fell further against the US Dollar (USD) on Thursday despite strong labor market data from Australia reported earlier in the session. The US seems to be enjoying demand thanks to the interest rate revisions, which saw the Federal Reserve (Fed) governors forecasting fewer rate cuts this year. In addition, the Greenback kept its strength despite soft inflation figures reported during the European session.

The Australian economy shows some signs of weakness, but the stubbornly high inflation is prompting the Reserve Bank of Australia to delay cuts, which may limit the downside.

Daily digest market movers: Australian Dollar maintains selling bias despite positive employment numbers

  • Australian Bureau of Statistics (ABS) released employment data showing a drop in Australia’s Unemployment Rate to 4.0% in May, meeting expectations. This figure marked a slight improvement from the previous rate of 4.1%.
  • Australian Employment Change increased to 39.7K in May from 38.5K in April, surpassing the forecast of 30.0K.
  • Participation rate increased slightly to 66.8% in May, up from 66.7% in April. There was a significant increase in Full-Time Employment, while Part-Time Employment decreased.
  • On the US side, the US Bureau of Labor Statistics revealed on Thursday that the Producer Price Index (PPI) for final demand in the US rose 2.2% on a yearly basis in May, indicating looser inflationary pressure than expected.
  • On the negative side, weekly Initial Jobless Claims came in higher than expected.

Technical analysis: AUD/USD sellers gather momentum, positive outlook remains

The Relative Strength Index (RSI) remains above 50 but points downwards, suggesting that bullish momentum might be losing steam. Meanwhile, the Moving Average Convergence Divergence (MACD) shows steady red bars indicating stable selling pressure.

However, the short-term outlook remains positive as the pair sustains its position above the 20-day Simple Moving Average (SMA) at 0.6640. If lost, the 100 and 200-day SMAs offer themselves as barriers around the 0.6560 area.

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.

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