The People’s Bank of China (PBoC) recently announced plans to reduce the Reserve Requirement Ratio (RRR) by 0.5 percentage points on February 5. This move by the PBoC is aimed at boosting bank lending to qualified developers and stimulating the real estate market. The announcement of these measures indicates the PBoC’s commitment to supporting economic growth in China.
China accounts for over 80% of Australian iron ore exports, making it a vital market for the Australian economy. With the potential improvement in the real estate market following the PBoC’s measures, there could be an increase in demand for iron ore. This would be a significant boon for Australia, as iron ore is one of its main export items.
A pickup in demand for iron ore and other commodities would have a positive impact on the Australian economy. With a trade-to-GDP ratio above 50% and 20% of the workforce engaged in trade-related jobs, Australia heavily relies on international trade for its economic growth.
The Australian dollar (AUD) is also likely to be affected by these developments. As the demand for Australian goods and commodities, such as iron ore, increases, the value of the Australian dollar may strengthen against other currencies.
While there are no economic indicators from Australia on Friday due to the closure of the Australian markets for Australia Day, US economic indicators warrant investor attention. Specifically, personal income/spending and inflation figures are expected to be released.
Economists forecast an increase of 3.0% in the Core PCE Price Index for December, following a rise of 3.2% in November. If inflation continues to remain sticky and personal income/spending trends continue to rise, market expectations for a March Federal Reserve (Fed) rate cut could reduce. This trend could drive demand-driven inflation and impact disposable income, potentially curbing consumer spending.
The near-term trends of the AUD/USD currency pair will likely be influenced by the upcoming US and Australian inflation figures. If US inflation remains sticky and Australian inflation turns out to be lower than expected, monetary policy divergence is likely to favor the US dollar.
It is worth noting that the AUD/USD is currently trading below the 50-day and 200-day Exponential Moving Averages (EMAs), suggesting bearish price signals. However, if the currency pair manages to break above the 200-day EMA, it could encounter resistance near the $0.66162 level. A further break above the 50-day EMA could support a move towards the $0.66500 handle.
Conversely, a break below the $0.65500 handle would indicate a potential fall towards the $0.64900 support level. The 14-period Daily Relative Strength Index (RSI) reading of 40.22 suggests that the AUD/USD may drop below the $0.65 handle before entering oversold territory.
The recent announcement by the PBoC to reduce the RRR and implement further measures to boost bank lending to qualified developers has potential implications for the Australian economy and the AUD/USD currency pair. An increase in demand for iron ore, driven by an improving real estate market in China, could benefit the Australian economy. However, the impact on the AUD/USD exchange rate will also be influenced by US economic indicators, particularly inflation figures. Traders and investors should closely monitor these developments and their potential impact on market trends and trading opportunities.
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