AUD/USD remains steady above 0.7670 as job concerns hurt the Greenback
- USD/AUD holds gains near 0.7100 highs favoured by the US Dollar's weakness.
- Renewed concerns about the US labour market have boosted hopes of Fed rate cuts.
- US Retail Sales, NFP, and CPI figures will guide the US Dollar this week.
The Aussie Dollar (AUD) has pulled back from fresh three-year highs near 0.7100 against the US Dollar, but remains steady above 0.7670 so far, as renewed US labour market woes are boosting hopes that the Federal Reserve (Fed) will have to cut losses more than projected.
Investors' concerns about the weak US labour market, triggered by last week’s data, have been aggravated by the comments of White House economic adviser Kevin Hassett on Monday. Hasset warned that job growth is likely to remain at low levels over the coming weeks, as population growth slows and productivity increases.
These comments have dampened hopes of a bright Nonfarm Payrolls (NFP) report on Wednesday, and heightened expectations that the US central bank will have to step up its monetary policy support. Investors are ramping up their bets for interest rate cuts this year, which is acting as a headwind for a significant US Dollar recovery.
Fed-RBA monetary divergence buoys the Aussie
The Reserve Bank of Australia (RBA), on the contrary, kicked off its monetary tightening cycle last week, and Governor Michelle Bulllock pointed to further rate hikes in the near-term. This has created an AUD-supportive monetary policy divergence.
On Tuesday, the focus is on the US Retail Sales report, which is expected to show a moderate slowdown in December. Apart from that. Wednesday’s NFP report and Friday’s Consumer Prices Index (CPI) data are likely to set the US Dollar’s direction.
In Australia, the highlight will be Thursday’s CPI figures, which might provide fresh cues about the timing of the RBA’s next rate hike.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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