The Australian Dollar (AUD) is experiencing a notable rally, continuing its upward trajectory for the third consecutive session. This increase is attributed to a mismatch in monetary policy outlooks between the Reserve Bank of Australia (RBA) and the U.S. Federal Reserve (Fed). The recent decline in China’s Caixin Manufacturing Purchasing Managers’ Index (PMI), which fell to 49.3 in September from 50.4 in August, has caught traders’ attention, as China is Australia’s primary trading partner. Anticipation surrounding Fed Chair Jerome Powell’s upcoming speech is also influencing market sentiment.
The weakening of the U.S. Dollar is a significant factor supporting the AUD/USD pair. This decline comes on the heels of the August Core Personal Consumption Expenditures (PCE) Price Index report, which indicated a modest monthly increase of 0.1%, falling short of the expected 0.2%. These figures align with the Fed’s perspective that inflationary pressures are subsiding, leading to speculation about potential interest rate cuts. Market forecasts are presenting a 42.9% chance of a 25 basis point cut in November.
The RBA’s continued commitment to maintaining a cash rate of 4.35% has further strengthened the Australian Dollar. The central bank maintains that its policy stance must remain restrictive to manage inflation effectively. Recent data from China also showed a slight improvement in the NBS Manufacturing PMI to 49.8 for September, though the Non-Manufacturing PMI dipped to 50.0, indicating a mixed economic outlook.
As China faces economic challenges, including rising bad loans and profit declines, it plans to inject over CNY 1 trillion into its major state banks. This is significant as it represents the largest capital infusion since the 2008 financial crisis. In Australia, although the financial system appears resilient, concerns linger regarding rising borrower defaults and its impact on the broader economy.
From a technical perspective, the AUD/USD pair is showing promising signs, holding just above the lower boundary of an ascending channel around 0.6920. If the pair can penetrate the upper boundary around 0.7000, further upward momentum may be anticipated. Conversely, a drop below the lower boundary could signal a shift in market sentiment, potentially causing the pair to test lower support levels.
