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Australian Dollar Outlook: All Eyes on CPI Ahead of RBA and Fed Meetings

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AUSTRALIAN DOLLAR FORECAST: BULLISH

  • The Australian Dollar turns to native CPI for clues on RBA motion
  • China’s PBOC easing boosted an all already scorching commodity market
  • Fed hawkishness seems priced into USD. Will AUD/USD profit?

After being held hostage to largely exterior elements thus far this yr, the main focus for AUD/USD will probably flip to home elements this week.

The all-important 4th quarter CPI numbers are due on Tuesday and the RBA will meet for the primary time in 2 months on 1st February.

AUD

On the face of it, these numbers shouldn’t current an excessive amount of of a problem for the RBA. If they arrive in near expectations, they won’t be compelled to behave too aggressively.

The mandated inflation goal is 2-3% over the enterprise cycle. They’ve beforehand said that “The central forecast is for underlying inflation to achieve 2½ per cent over 2023.” Underlying inflation is the trimmed imply measure.

Nonetheless, any upside shock could set off the market to anticipate a extra hawkish RBA. They’ve beforehand indicated that the asset buy program might be reconsidered on the February assembly.

Apart from CPI, employment is one other key part for the RBA to think about and information out this week confirmed a strong jobs market in December. 64.8k jobs have been added for the month, consistent with expectations. That is because the unemployment charge was higher than anticipated, dropping to 4.2% from 4.6% beforehand.

An inflation print near forecasts is prone to result in market expectations of the RBA lowering, or doubtlessly eliminating, the asset buy program.

This week noticed the Peoples Financial institution of China (PBOC) ease financial coverage by including liquidity and chopping a number of key borrowing charges. A zero case Covid-19 coverage and regarding developments of their property sector prompted the motion.

This noticed iron ore and different ferrous metals cost larger. Power commodities, gold, copper and aluminium proceed to trade at elevated ranges, including to Australian export {dollars}.

For now, so long as AUD/USD stays within the low 70’s, the phrases of trade will probably proceed to surge, supporting the home economic system even additional. If the AUD/USD appreciates, then that can trigger the phrases of trade to imply revert.

After all, the US Dollar will proceed to play a task for AUD/USD and the Federal Reserve might be assembly this week. The market is keenly anticipating additional steerage on the speed hike timeline and the tempo of the Fed steadiness sheet roll off.

Regardless of a pullback to finish the week, US Treasury yields have soared into 2022, dragging G-10 yields up with them. The 10-year unfold of Australian Commonwealth Authorities bonds (ACGB) to Treasuries has begun widening once more.

Additional widening of this unfold could be supportive of AUD. Elevated commodity costs and a doubtlessly hawkish RBA might also assist to underpin AUD/USD.

CHART – AUD/USD, IRON ORE (SGX) AND CRUDE OIL (WTI)

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— Written by Daniel McCarthy, Strategist for DailyFX.com To contact Daniel, use the feedback part beneath or @DanMcCathyFX on Twitter

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