Australian Dollar mildly up on quiet Wednesday, markets gear up for US CPI

The
Reserve
Bank
of
Australia
(RBA)
sets
interest
rates
and
manages
monetary
policy
for
Australia.
Decisions
are
made
by
a
board
of
governors
at
11
meetings
a
year
and
ad
hoc
emergency
meetings
as
required.
The
RBA’s
primary
mandate
is
to
maintain
price
stability,
which
means
an
inflation
rate
of
2-3%,
but
also
“..to
contribute
to
the
stability
of
the
currency,
full
employment,
and
the
economic
prosperity
and
welfare
of
the
Australian
people.”
Its
main
tool
for
achieving
this
is
by
raising
or
lowering
interest
rates.
Relatively
high
interest
rates
will
strengthen
the
Australian
Dollar
(AUD)
and
vice
versa.
Other
RBA
tools
include
quantitative
easing
and
tightening.

While
inflation
had
always
traditionally
been
thought
of
as
a
negative
factor
for
currencies
since
it
lowers
the
value
of
money
in
general,
the
opposite
has
actually
been
the
case
in
modern
times
with
the
relaxation
of
cross-border
capital
controls.
Moderately
higher
inflation
now
tends
to
lead
central
banks
to
put
up
their
interest
rates,
which
in
turn
has
the
effect
of
attracting
more
capital
inflows
from
global
investors
seeking
a
lucrative
place
to
keep
their
money.
This
increases
demand
for
the
local
currency,
which
in
the
case
of
Australia
is
the
Aussie
Dollar.

Macroeconomic
data
gauges
the
health
of
an
economy
and
can
have
an
impact
on
the
value
of
its
currency.
Investors
prefer
to
invest
their
capital
in
economies
that
are
safe
and
growing
rather
than
precarious
and
shrinking.
Greater
capital
inflows
increase
the
aggregate
demand
and
value
of
the
domestic
currency.
Classic
indicators,
such
as
GDP,
Manufacturing
and
Services
PMIs,
employment,
and
consumer
sentiment
surveys
can
influence
AUD.
A
strong
economy
may
encourage
the
Reserve
Bank
of
Australia
to
put
up
interest
rates,
also
supporting
AUD.

Quantitative
Easing
(QE)
is
a
tool
used
in
extreme
situations
when
lowering
interest
rates
is
not
enough
to
restore
the
flow
of
credit
in
the
economy.
QE
is
the
process
by
which
the
Reserve
Bank
of
Australia
(RBA)
prints
Australian
Dollars
(AUD)
for
the
purpose
of
buying
assets
–
usually
government
or
corporate
bonds
–
from
financial
institutions,
thereby
providing
them
with
much-needed
liquidity.
QE
usually
results
in
a
weaker
AUD.

Quantitative
tightening
(QT)
is
the
reverse
of
QE.
It
is
undertaken
after
QE
when
an
economic
recovery
is
underway
and
inflation
starts
rising.
Whilst
in
QE
the
Reserve
Bank
of
Australia
(RBA)
purchases
government
and
corporate
bonds
from
financial
institutions
to
provide
them
with
liquidity,
in
QT
the
RBA
stops
buying
more
assets,
and
stops
reinvesting
the
principal
maturing
on
the
bonds
it
already
holds.
It
would
be
positive
(or
bullish)
for
the
Australian
Dollar.