The Australian Dollar (AUD) experienced a significant decline, hitting its weakest level since September 5, as the US Dollar (USD) strengthened following a series of robust economic reports from the United States. The AUD/USD exchange rate declined to around 0.6536, about a -0.70% decline on the day. At the same time, the US Dollar Index (DXY) skyrocketed to just under 98.55, hitting a multi-month high in over three weeks.
The US economy has been on a tear in recent months, increasing faith in its adaptability. This manufacturing renaissance is one of many factors supporting the strength of the USD. Durable Goods Orders unexpectedly rebounded by 2.9% in August, well above analysts’ forecasts and further indication of strong manufacturing activity. Moreover, weekly Initial Jobless Claims dropped to 218,000, coming in well below the expected 235,000. These remarkably positive economic indicators feed into a narrative of economic stability that has resulted in strengthened demand for the USD.
A weakening in the Australian economic landscape came with the release of the Monthly Consumer Price Index (CPI) for August. The report showed that inflation jumped up to 3.0% on an annual basis. This completed index is up from only 2.8% in July. It indicates that inflationary pressures remain the key bugbear for Australia’s policymakers. The unexpected complexity for the RBA comes after fresh inflation data confirmed Australian inflation remains stubbornly high. They have been walking a tightrope between curbing inflation and stimulating the economy.
Market watchers will have seen that this now prices-in a very low probability of any further interest rate rise from the RBA in coming months. The prevailing view among economists in investment banks is that a rate cut is likely in November. This forward-looking mindset couldn’t be more different than the mood surrounding US monetary policy. We know that the Federal Reserve (Fed) is doing everything it can, and then some, to tame inflation. Meanwhile, at the same time, it’s buoying the labor market.
These economic developments have a huge impact on fundamental currency valuation. In doing so, they influence the tenor and tone of international investor sentiment and risk appetite. As the USD resumes its strength against other currencies, risk sentiment has been further depressed. Naturally, investors are growing more risk averse, resulting in a flight to safety that traditionally favors the world’s reserve currency, the US Dollar.
All eyes now are on Friday’s US core Personal Consumption Expenditures (PCE) inflation data release. This makes this report an especially important signaler of direction for Fed policy, and it has arguably helped to push currency dynamics that much further. Analysts are especially interested in any signs that would change the outlook for future interest rate moves.
The heat map illustrates how the 10 most traded currencies have increased or decreased percentages against each other. It obviously strengthens the whole narrative of USD strength = AUD weakness. The US Dollar’s strong performance in extreme currency pairs further emphasizes the Dollar’s strength and dominant market position as we stand today on global markets.