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Australian Dollar hits two-month low spurred by private payrolls report

  • Australian Dollar breaks to new lows after the release of strong US labor data for July. 
  • ADP Employment Change rises by 324K, easily beating the 189K estimate. 
  • The data follows a run of weakness for the Aussie after a sour market mood turned investors risk averse. 

The Australian Dollar (AUD) reaches new two-month lows against the US Dollar (USD) on Wednesday, after the release of US private payrolls data shows a larger-than-expected expansion of the workforce in July. 

Data from the US’s largest payroll processor ADP, showed an unexpected rise of 324K jobs in July versus the 189K predicted. The data reinforces the view that the US labor market is rock solid and inflation is likely to remain stubbornly high. The Federal Reserve is more likely to maintain interest rates higher for longer if more people are earning, and higher interest rates are positive for the US Dollar as they attract greater foreign capital inflows. 

Australia’s largest export Iron Ore is also in decline, further hitting the Australian Dollar, with Chinese Iron Ore Futures reaching a new low for July in the $108s. 

AUD/USD trades in the 0.65s during the US session.  

Australian Dollar news and market movers 

  • The Australian Dollar loses ground against the USD after ADP payroll data shows a greater-than-expected rise in new employees in July. 
  • US private sector added 324K new workers in July when only a 189K increase had been forecast by economists, although the figure was still below the 497K in June. 
  • A risk-off mood permeated markets on Tuesday, weighing on the Australian Dollar after weaker-than-expected US ISM Manufacturing PMIs for July and JOLTS Job Openings in June weighed on animal spirits. 
  • The market mood was not helped by data from China, showing business activity in the manufacturing sector fell into contractionary territory in July, with the Caixin Manufacturing PMI falling to 49.2 in July from 50.5 in June. 
  • The Australian Dollar was already on a weak footing after the RBA left the policy rate unchanged at 4.1% on Tuesday morning, against the market expectation for a 25 basis points hike. In the policy statement, the RBA explained that the decision to hold rates unchanged would provide them more time to assess the impact of policy tightening to date and the economic outlook. 
  • That said, they did not completely rule out the possibility of more rate hikes in the future, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks,” the RBA noted.

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. 

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. Price is currently moving down nearer to this key low. 
 

Australian Dollar vs US Dollar: Weekly Chart

Price has now broken cleanly through the confluence of moving averages (MA) close to 0.6700, made up of most of the major SMAs – the 50-week, 50-day and 100-day. The breaching of this key support and resistance level is a bearish sign. 

Australian Dollar vs US Dollar: Daily Chart

It is possible price may have completed a Measured Move pattern or three wave ABC correction (see daily chart), in July. If so, there is a chance it may be about to start a short-term upcycle. Given how bearish price action is at the moment, however, the chances of this scenario unfolding are diminishing by the hour. 

AUD/USD has now also broken below the 0.6600 June lows on an intraday basis, and a continuation down to the key May lows at 0.6460, is quite possible. A decisive break below them would open the way for a move down to 0.6170 and the 2022 lows. 

Because the pair is in a sideways trend on the higher time-frame charts, the probabilities do not favor either bears or bulls overall – nor is the Relative Strength Index (RSI) providing much insight on either timeframe. 

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. 

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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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