Australian dollar roars higher

The Australian dollar continues to exhibit sharp volatility. AUD/USD declined by 0.82% on Friday but has bounced back today and soared 1.15%. Currently, the pair is trading at 0.6990.

Let’s take a look at the reasons that the Aussie was pummelled on Friday. First, a sparkling US nonfarm payrolls report on Friday sent the US dollar broadly higher. The July release showed the economy added a massive 528 thousand new jobs, crushing the estimate of 250 thousand and above the June gain of 398 thousand. Unemployment ticked down to 3.5% from 3.6%, and wage growth remained unchanged at 5.2%, ahead of the forecast of 4.9%. The data points to a robust, but tight US labour market. For the Fed, the strong gain in wages is well above the Fed’s inflation target of 2% and lends support to another supersize rate 0.75% hike come September.

The US labour market remains solid, but the sharp tightening of rates has reduced activity in other parts of the economy, especially manufacturing and goods and service. Still, the US does not appear to be in a recession despite all the noise after two straight negative quarters of GDP, which meets the technical definition of a recession. Another definition is significant activity across the economy, and that is clearly not the case in the US, with a red-hot labour market. After the home-run NFP on Friday, US recession fears have abated.

RBA revises inflation, growth forecasts

The Australian dollar also lost ground due to the RBA’s quarterly Monetary Policy Statement on Friday. The RBA warned that the economy will slow as inflation continues to accelerate. The statement started with a discussion about inflation, indicative of the importance with which the central bank views inflation. In the statement, the RBA revised its forecast for inflation peaking at 7.75%, up from the May forecast of 5.9%. Growth forecasts have been lowered, with the RBA now projecting 3.25% growth, down from 4.25%.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6943, followed by resistance at 0.7016
• There is support at 0.6839 and 0.6766

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