AUDUSD Rallies on Diverging Policies and China’s Stimulus Boost

The AUDUSD has shown strong bullish momentum since August 5, driven by a “Golden Cross” and positive technical indicators. The Reserve Bank of Australia’s (RBA) decision to keep rates steady at 4.35% has supported the Australian dollar, while the US Federal Reserve’s 50 basis point rate cut has weakened the US dollar. Additionally, China’s recent stimulus measures have boosted optimism for Australia’s export-driven economy, further supporting the AUD. Key Fibonacci retracement levels point to potential targets at 0.69461, 0.71457, and 0.74686.

The latest monetary policy decisions by the Reserve Bank of Australia (RBA) and the Federal Reserve have had significant effects on the AUDUSD exchange rate. The RBA’s decision to hold its interest rate steady at 4.35% reflects a cautious stance that tends to support the Australian dollar as it reassures investors of steady returns in the AUD.

On the other hand, the Fed’s decision to slash interest rates by 50 basis points has a profound effect on the AUDUSD exchange rate. This move weakens the US dollar, as lower rates diminish the yield on USD-denominated assets, making them less appealing to global investors. Consequently, the AUDUSD likely experienced an initial surge following the Fed’s rate cut, driven by a weakening USD and the allure of a stable Australian rate environment.

Investors may see the Fed’s substantial interest rate cut as a sign of growing economic worries in the US. This could lead to a sustained increase in the exchange rate of the Australian dollar compared to the US dollar.

The Australian dollar (AUD) is closely tied to China’s economic performance due to strong trade relationships. China is a significant export destination for Australia, which supplies raw materials like iron ore and coal. When China’s economy grows, demand for these resources increases, boosting the AUD. Conversely, economic downturns in China can weaken the AUD as reduced demand for exports negatively impacts the Australian economy.

In August 2024, Australia’s Consumer Price Index (CPI) rose 2.7% year-over-year, a deceleration from July’s 3.5% increase. Housing costs (+2.6%), food and non-alcoholic beverages (+3.4%), and alcohol and tobacco (+6.6%) were key drivers of inflation, while transport costs decreased by 1.1%, largely due to a 17.9% drop in electricity prices from government rebates. Automotive fuel prices also fell by 7.6%, easing pressure on the transport sector. Despite the moderation, rental prices and new dwelling costs continued to climb, reflecting persistent housing market challenges. This cooling inflation followed the Reserve Bank of Australia’s (RBA) decision to hold interest rates unchanged, contrasting with the US Federal Reserve’s recent rate cuts aimed at easing economic pressures.

China’s central bank introduced a major stimulus package aimed at preventing a deflationary spiral in the country’s economy. This policy includes interest rate cuts, increased cash for banks, home-buying incentives, and potential plans for a stock stabilization fund. The measures, announced at a high-level press conference, caused a positive market reaction, with Chinese stocks seeing their biggest gain since 2020.

Despite this temporary boost, economists believe the stimulus is only a short-term solution and that deeper structural reforms are needed to address China’s economic challenges, including a prolonged property market slump, weak consumer prices, and global trade tensions. While providing some relief, the policy moves are unlikely to reverse the economic slowdown without more substantial efforts to stimulate domestic consumption and reform the economy.

The urgency of the situation was underscored by the fact that the measures were hastily implemented following concerns that China might miss its annual growth target. While the immediate effect has been a market rebound, many believe that long-term economic issues remain unresolved, requiring further action to prevent a prolonged downturn.

The AUDUSD pair has seen a strong bullish trend since August 5 after rebounding from the 0.63474 low. The upward momentum accelerated on August 21 with a “Golden Cross” when the 20-period Exponential Moving Average crossed above the 50-period EMA, signaling a bullish reversal. This, combined with a failure swing reversal, has set the stage for further gains. Utilizing Fibonacci Retracement from the swing high of 0.68228 to the swing low of 0.66209, key targets emerge at 0.69461, 0.71457, and 0.74686, indicating potential upward levels.

In conclusion, the AUDUSD has shown strong upward momentum driven by key factors such as the Reserve Bank of Australia’s decision to hold rates steady at 4.35%, the US Federal Reserve’s 50 basis point rate cut, and stimulus measures from China. While technical signals like the “Golden Cross” suggest further bullish potential, China’s economic growth remains a key factor influencing the Australian dollar’s future trajectory. Traders should remain cautious of global economic developments as they monitor key levels for potential opportunities in the AUDUSD exchange rate.