Australian Dollar holds above 0.7050 as hot CPI boosts RBA hike bets
- AUD/USD rises 0.40% after the Fed holds interest rates steady.
- Australian trimmed mean CPI accelerates to 3.7%, strengthening expectations for further RBA tightening.
- December Fed hike odds climb to 85% ahead of US PCE and GDP data.
The AUD/USD drifts higher by 0.40% on Wednesday after the Federal Reserve held rates unchanged, while Fed Chair Kevin Warsh hinted that "officials had made clear our readiness to act as circumstances require, and we have shown our willingness to act.” The AUD/USD trades at 0.7053.
AUD/USD extends gains as Australian inflation strengthens the case for November tightening despite Warsh's hawkish stance
The highlight of the week passed, and the financial markets calmly digested the Fed’s decision and Warsh's remarks. Money markets expected a hold, and in the press conference, Warsh reaffirmed the committee’s commitment to drive inflation to the Fed’s 2% goal.
Furthermore, he added that tightening policy is working but refrained from calling financial conditions tight. Warsh said there is no “soft inflation target” and stated that the price stability target is 2%, as measured by the Personal Consumption Expenditures (PCE).
Before, the Fed, in its monetary policy statement, recognized that economic activity is strong, that job market gains “have kept pace with the workforce,” and that, although inflation is high, it would wait for more data to assess the appropriate policy stance.
Aside from the Fed’s decision, the docket remained absent. The swaps market had priced in an 85% chance of a 0.25% rate hike in December, according to Prime Terminal.
In Australia, the Trimmed Mean CPI in September rose by 3.7% YoY, up from 3.5%, cementing the case for another rate increase. After the data release, the Reserve Bank of Australia (RBA) Deputy Governor Hauser said that “inflation is too high.”
ANZ analysts, in a note, commented that they expect a 25 basis points rate hike in November and “expect to see upward revisions to the RBA’s inflation forecasts which will be published in the November SMP.”
On the calendar
The Aussie’s docket is absent. In the US, the schedule is busy with the release of the Fed’s favorite inflation measure, the Core PCE, Gross Domestic Product (GDP) figures and jobless claims.
AUD/USD Price Forecast: Technical outlook
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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