AUD/USD tests new high ahead of RBA interest rate decision

AUD/USD tests new high ahead of RBA interest rate decision
  • The AUD/USD pair rallied as the market waited for the RBA interest rate decision scheduled for tomorrow.
  • Earlier on, PMI data from Australia and China suggested that the Austrian economy had reached a bottom.
  • The Australian manufacturing PMI of 44 was slightly better than the analysts' forecasts of 42.8.

The Australian dollar is the best-performing currency in the developed world today as investors focus on the improving business conditions in Australia and China. Investors are also focused on the RBA interest rate decision that will be released tomorrow. The AUD/USD is up by 1% and is trading at 0.6730 while the GBP/AUD and EUR/AUD are trading at 0.5432 and 0.6054, respectively.

Australian dollar rises
AUD/USD rises ahead of RBA decision

Australia manufacturing PMI

The manufacturing sector in Australia continued to experience significant interruptions because of the coronavirus pandemic. According to Markit, the PMI continued to contract in May, reaching an all-time low of 44.0. This rate was worse than the April contraction of 44.1 but better than the consensus estimates of 42.8. Another report by AIG showed that the PMI rose from the previous 35.8 to 41.6.

The manufacturing PMI is conducted by sending surveys to manufacturers who answer questions on output, new orders, employment, input inventories, and delivery times. A reading below 50 usually shows that the sector is in contraction mode.

According to Markit, new local and international orders declined for the second straight month while the volume of production declined sharply. As a result, most countries offset this contraction by reducing their capacity and reducing their purchasing activity.

Input costs continued to rise and the time taken to deliver inputs and products continued to rise. Fortunately, most Australian manufacturers are optimistic about the future as the country reopens.

Manufacturing is an important sector for Australia that employs almost 900,000 people and accounts for about 11% of total GDP. According to Ai Group, manufacturers spent more than $53.1 billion in wages in 2018.

AUD/USD reacts to Chinese manufacturing data

The AUD/USD pair also reacted to the positive manufacturing PMI data from China. According to Markit, manufacturing PMI in China came back to expansion territory in May. It rose to 50.7 from the previous 49.4.

According to Markit, this increase was due to a strong increase in output, which rose to the highest level since 2011. Still, demand conditions were subdued, mostly due to weak international orders.

In general, the manufacturing sector saw an increase in output, a decline in backlogs, and downward pressure on industrial products prices. In a statement, Markit said:

“Supply was generally stronger than demand in the manufacturing sector, as production continued its expansion amid a broader economic rebound while demand had yet to recover.”

The Chinese data matter for the AUD/USD pair mostly because of the Australian dependence on China. The country buys more than 60 per cent of all Australian exports. Also, the Chinese consume a substantial amount of Australian services.

RBA interest rate decision preview

The AUD/USD pair continued rallying ahead of the RBA interest rate decision. The bank’s monetary policy committee started its meeting today and will release its decision tomorrow at 04:30 (GMT).

With the Australian economy improving, most analysts expect the bank to leave interest rates unchanged at 0.25%. The bank will also likely leave the target of the 3-year yield on Australian government bonds at 25 basis points.

In the past monetary policy statement, the bank said that it had started scaling back its bond purchases but committed to scale-up if the economy continues to deteriorate. With recent numbers being relatively strong, the bank will probably not scale-up the purchases.

Analysts will also be watching the bank’s economic outlook for Australia. In the previous meeting, they said that GDP would fall by about 10% in the first half the year and by about 6% in 2020. They also expect the economy to bounce back by 6% in 2021. Nonetheless, the bank also considered a scenario where the economy recovers faster than earlier expected.

AUD/USD technical outlook

AUD/USD
AUD/USD technical analysis

The AUD/USD pair is trading at 0.6730, which is slightly below the day’s high of 0.6775. On the daily chart, the price also crossed the 78.6% Fibonacci Retracement level. It is also above the 50-day and 100-day exponential moving averages. Therefore, I expect the pair to continue rallying as bulls attempt to test the next resistance at 0. 6800.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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