AUD and the RBA Hawks: Inflation and retail data support further rate hikes
12:57, 11 January 2023
AUD had a brutish 2022, cratering from near 0.76 at the start of April to 0.62 in October. Stronger than expected inflation and retail sales has helped buoy AUD from around 0.67 at the start of last week to within spitting distance of 0.6950 (Monday).
Helped by strong South China Sea gusts: China’s pull-out from zero-tolerance Covid lock-down to ‘store open’ is shockingly abrupt. How to separate the stronger OZ domestic data from a Chinese re-open?
Around lunchtime AUD was 0.01% higher at 0.6894; DXY was 0.15% higher at 103.11; EUR/USD was 0.02% higher at 1.0734; GBP/USD was 0.25% down at 1.211 though USD/JPY was 0.33% up on yesterday at 132.68.
The China reopening trade is on – how will AUD fare?
China is back in the game
Capital markets specialist Piero Cingari is skeptical of home-grown consumer-driven optimism. The numbers look worryingly superficial. Reserve Bank of Australia (RBA) interest rate hikes are now driving Oz’s biggest housing market slump for four decades.
“My view is that domestic data is less relevant for AUD, while global factors dominate, in particular the China reopening.”
He goes on: ”Yes we had strong CPI [November CPI surged to 7.3% from 6.9% in October, core inflation lifted to 5.6% from 5.3%] and stronger-than-expected retail sales in November but on Monday we had weaker than expected housing market data.”
“The AUD is now less sensitive to those domestic developments. It’s following the wave of the Chinese reopening.” Australian house prices fell 5.3% through 2022 – see latest Corelogic data.
What is your sentiment on AUD/USD?
RBA hard on the gas for the moment
Australians obsess about their housing market even more than Brits. Many are over-burdened – too – by crushing debt-to-affordability. The RBA cash rate is 3.1%, which lifted 25bp in early December. Overall, the RBA’s responsible for a 300bp rate surge.
Its gauge-of-choice for price change is the trimmed mean, which hit 6.1% between July and September, massively outside the RBA 2%-3% target.
How many more rate rises to come? It’s impossible to know though ANZ has indicated the RBA could go to 3.85% by early summer.
Quarter change?
Oz December jobs numbers arrive next week and the RBA will have the quarterly inflation report on 24 January to hand, a fortnight before its 7 February meeting.
“The cash target rate sits at 3.10%,” says Marc Chandler of Bannockburn Global Forex. “Many observers are more inclined to see a 15 bp hike because to bring it back to quarter point increments.”
“The terminal rate is expected to be reached near mid-year around 3.75%, with less than 50% chance it reaches 4.0%.”
But the RBA must be more confident about the Chinese re-opening news, instrumental to Australia’s key iron ore exports and responsible for $133bn of revenues in 2021-22 claims the Minerals Council of Australia.
Iron grip, still
And while Australia’s economic base is thin, worryingly over-dependent on investment, consumer spending and exports, iron ore prices are rising.
Most Chinese Covid-19 measures were removed in December and the ending of mandatory quarantine for entering mainland China means business travel will resume soon, despite spiking Covid cases.
For now, the RBA’s biggest day job pressure is the November CPI 7.3% figure – it’s bad.
“Today's data,” says analyst Robert Carnell at ING, “adds more risk to our view that the RBA will stop raising rates once it reaches 3.6% – another two 25bp rate hikes from here – and we may have to raise that to 3.85% if we don't see some more encouragement from other figures, for example, the labour data.”
“But…this latest inflation data offered just enough hope that this is a temporary setback to enable us to defer that decision for a little while longer.”
Yesterday USD fell to roughly seven-week low on Monday against fellow AUD commodity currency the Canadian dollar, near CAD 1.3360. “A move above CAD 1.3465,” adds Marc Chandler, “which would probably accompany weaker US equities, could spur gains toward CAD 1.3500.”
Fx Strategist and Finance Consultant at Keirstone, Francis Fabrizi
- AUD/USD is attempting to break above the 0.6950 resistance level this morning observers Fabrizi. “If it holds above this level, it will likely push higher towards 0.7000.”
- “If price fails to break above the resistance level, I believe it will fall back down towards the 0.6850 support level.”
- “Looking at the weekly timeframe, price remains in a long term bearish trend for now however it is showing strong indications that it will gain further bullish momentum now. A break above 0.7100 will confirm a bullish reversal.”
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