AUD: Hawkish RBA and commodities cushion energy shock – MUFG

MUFG’s Senior Currency Analyst Lee Hardman reports that the Australian Dollar and Canadian Dollar are holding up better against the US Dollar than European currencies. The Aussie is supported by hawkish remarks from RBA Governor Bullock, who stressed every meeting is live and highlighted upside inflation risks from Middle East tensions. Higher Australian yields support AUD, though sustained energy-driven risk-off could eventually pressure the currency.

RBA stance and yields underpin Aussie

"The Australian dollar has derived support from hawkish comments overnight from RBA Governor Bullock. She stated that “every meeting is live” in response to a question on whether the RBA was only adjusting rates on a quarterly basis and a March move could be discounted. It has encouraged Australian rate market participants to bring forward expectations for a second rate hike at the start of this year."

"She stated that “we have inflation at 3.8% and the board will be actively looking at whether or not it needs to move more quickly. So I would discourage people from thinking that we necessarily only need to move quarterly”. She added as well that the RBA is “very alert” to potential implications for inflation expectations from the Middle East conflict and is “well positioned” for a policy response if required."

"With the RBA already concerned over the risk of higher inflation proving more persistent in Australia, the jump in energy prices could encourage the RBA to pull the trigger on further rate hikes at the start of this year."

"Higher yields are helping to support the Aussie but it could come under more selling pressure if higher energy prices eventually trigger a bigger correction lower for risk assets."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)