Australian Dollar Weakens Amid Concerns Over China’s Economic Growth

The Australian Dollar (AUD) has depreciated against the US Dollar (USD) as of Tuesday, largely due to increasing concerns over China‘s economic performance. Analysts have highlighted that recent weak economic indicators from China present significant challenges for the world’s second-largest economy. Given China’s status as a critical trading partner for Australia, fluctuations in its economic health exert considerable influence on the Australian market.

Economists from leading financial institutions, including Goldman Sachs and Citi, have revised their growth forecasts for China in 2024, now predicting a rate of 4.7%, which falls short of Beijing‘s target of about 5.0%. Other financial entities, such as SocGen and Barclays, describe the economic outlook as a “downward spiral” and a transition “from bad to worse,” characterizing it as a “vicious cycle.” Meanwhile, Morgan Stanley has issued warnings that conditions could deteriorate further before showing signs of improvement, as reported by Reuters.

Despite the current challenges, the Australian Dollar’s decline may be moderated by the hawkish stance of the Reserve Bank of Australia (RBA). Conversely, the US Dollar is facing pressure due to growing expectations of a significant 50 basis points rate cut scheduled for Wednesday.

According to the CME FedWatch Tool, markets are now pricing in a 38.0% probability of a 25 basis point cut by the Federal Reserve at its September meeting, with the likelihood of a 50 basis point reduction increasing to 62.0%, up from 50.0% just one day earlier. This marks a shift in market anticipation towards more assertive monetary easing.

The AUD/USD currency pair is currently trading near the 0.6750 mark as of Tuesday. Technical analysis shows that the pair has moved above the upper limit of a descending channel, suggesting a reduction in bearish sentiment. Additionally, the 14-day Relative Strength Index (RSI) is marginally above the 50 level, indicating a potential shift from bearish to bullish momentum.

On the upside, breaking above the descending channel has initiated a bullish trend for the AUD/USD pair, which could propel it towards its seven-month high of 0.6798 and potentially test the significant 0.6800 psychological level.

There is possible support on the downside around the 0.6719 level at the nine-day Exponential Moving Average (EMA), followed by the upper boundary of the descending channel at around 0.6690. A return to this descending channel may reinforce bearish tendencies and force the pair towards the throwback support zone near 0.6575, descending further to the channel’s lower boundary at approximately 0.6550.

The Reserve Bank of Australia (RBA) plays a critical role in setting interest rates and managing monetar policy, holding 11 scheduled meetings annually along with emergency sessions as needed. The RBA aims to ensure price stability by targeting an inflation rate between 2-3%, while also contributing to the currency’s stability, full employment, and overall economic prosperity and welfare of Australians. Interest rates are the primary instrument utilized by the RBA to control market conditions. Generally, higher interest rates serve to strengthen the Australian Dollar, and vice versa, with other tools including quantitative easing and tightening.