- AUD/USD gives up most of its post-NFP gains but remains modestly higher on the day, still on track for its biggest weekly loss since March.
- The US NFP report showed only 73K jobs added in July, well below the 110K expected.
- Australia’s Q2 Producer Price Index slowed to 3.4% YoY and 0.7% QoQ, indicating easing input cost pressures.
The Australian Dollar (AUD) remains under pressure against the US Dollar (USD) on Friday, giving back most of its earlier gains despite broad weakness in the Greenback following a disappointing Nonfarm Payrolls (NFP) data. The AUD/USD initially surged nearly 70 pips after US jobs data surprised to the downside, but the momentum quickly faded as markets shifted focus to rising expectations of an interest rate cut by the Reserve Bank of Australia (RBA) at its upcoming meeting on August 12. The dovish outlook is keeping the Aussie pinned near multi-week lows.
At the time of writing, the AUD/USD pair is edging lower, hovering around 0.6446 during the American trading hours, though still modestly up 0.30% on the day. The pair remains on track to record its biggest weekly decline since March. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, has pulled back from the two-month high of 100.26 marked earlier on Friday and is currently trading near 99.13, as expectations for a September interest rate cut rise following weaker US labor market data.
The July NFP report showed the US economy added just 73,000 jobs, falling well short of the 110,000 expected, marking the weakest print of the year. To add to the disappointment, prior months were revised sharply lower, with May and June payrolls slashed by a combined 258,000 jobs. The Unemployment Rate edged up to 4.2%, in line with expectations, while wage growth remained steady at 0.3% MoM and 3.9% YoY. The data signaled a cooling labor market and prompted a swift repricing of interest rate expectations. According to the CME FedWatch Tool, markets are now assigning an 82% probability of a rate cut at the Federal Reserve’s (Fed) September policy meeting, up sharply from 37% before the report was released.
US President Donald Trump questioned the credibility of the latest jobs report, claiming the figures are being produced by a “Biden appointee,” and said he has directed his team to fire the Commissioner of Labor Statistics, calling for more accurate data.
Data released earlier on Friday by the Australian Bureau of Statistics showed that the Producer Price Index (PPI) rose by 3.4% YoY in the second quarter, down from 3.7% in Q1. On a quarterly basis, PPI increased by 0.7%, easing from the 0.9% rise recorded in the previous quarter.
Consumer Price Index (CPI) data in the second quarter showed annual inflation slowing to 2.1%, while the Reserve Bank of Australia’s (RBA) preferred trimmed mean measure came in at 2.7% — comfortably within the RBA’s 2–3% target range. Commenting on the release, RBA Deputy Governor Andrew Hauser said the figures were “very much as we had expected,” suggesting the data is in line with the central bank’s outlook for continued disinflation. The softer inflation print strengthens the case for a possible rate cut at the RBA’s upcoming policy meeting on August 12.
The softer inflation print, combined with easing producer price pressures, adds to expectations that the RBA may cut interest rates at its upcoming policy meeting on August 12.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Read the full article here
