Australian Dollar Extends Losses

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The Australian dollar can’t find its footing and continues to lose ground against the surging US dollar. AUD/USD was down considerably earlier today but has pared most of these losses. In the North American session, AUD/USD is trading at 0.6425, down 0.14%.

Australia retail sales higher than expected

Australia’s retail sales for August rose 0.6% MoM, above the consensus of 0.4%. This was slower than the super-strong gain of 1.3% in July, but household spending appears to be holding well, despite the Reserve Bank’s rate-tightening cycle and high inflation. The RBA hiked rates by 0.50% earlier this month, bringing the cash rate to 2.35%.

The RBA isn’t done with the current tightening cycle, but some Bank officials had signalled that the pace of tightening would slow after a series of large 0.50% rate increases. The strong retail sales release puts such a scenario in doubt since it’s unlikely that inflation has peaked if retail sales remain strong. The central bank has designated inflation as public enemy number one and needs the economy to slow in order to curb inflation, even if that means the price is a recession. The RBA meets on October 4th and may have to deliver another 0.50% and hold off from easing on rates until the data shows that the economy is slowing.

Fed officials have signalled that the current cycle may soon come to a close, but the markets don’t expect any easing until there are clear signs that inflation has peaked. Although CPI dropped in August, inflation was higher than expected, which poured cold water on any hopes of the Fed easing up on policy.

The war in Ukraine has seen some worrying developments, which is weighing on risk sentiment. The Nord Stream pipeline system, although inactive, was hit by explosions that appear to have been deliberate. This follows the sham referendums in Russian-occupied Ukraine, which Moscow expected to formally annex the territories on Friday. This double-whammy of a hawkish Federal Reserve and a loss of risk appetite due to the escalation of the war in Ukraine has pushed the Aussie to its lowest levels since April 2020.

AUD/USD Technical

• AUD/USD has support at 0.6623 and 0.6523
• There is resistance at 0.6769 and 0.6869