AUDUSD: hikes vs growth concerns
The Reserve Bank of Australia (RBA) looks set to join the growing group of central banks raising interest rates after Australia’s inflation data came in hotter than expected earlier this week.
All else being equal, rate hikes could be a positive driver for a currency. But all else is rarely equal. That’s perhaps even more applicable when markets are battling with the lingering impact of the pandemic, China locking down, the Ukraine conflict and scrambled supply chains.
One excellent example of this has been the ‘seasonality’ of the pound. Over the past 13 years, the April monthly GBPUSD candle closed green 11 times. While 11/13 seems significant, statistical scientists would have a fit and lecture us on the small sample size: they’d say this ‘pattern’ is most likely a product of randomness.
Nonetheless, this ‘seasonality’ comes up every year in trading circles and research notes. They might not be so keen to remind us next year. On April 28th 2022, GBPUSD is down by 5% on the month…
This is just one example that highlights the challenging environment traders and investors are navigating. Some of the assumptions about how things ‘usually’ work are proving less than reliable!
For the Australian dollar, there's a lot to consider. The RBA is pivoting away from their dovish stance. They’ve signalled that the economy is on the right path, and annual wage growth above 3% would likely be the final piece of the puzzle.
The quarterly wage price index will be released on May 18th just before the Australian election on 21st May. As the next RBA meeting will be held on May 3rd before either of those events, consensus was building around a hike at the 7th June meeting. All nice and tidy. But then…
Inflation ‘came in like a wrecking ball’ and the headline writers had a field day
AUSTRALIAN INFLATION HITS 20 YEAR HIGH
- Q1 CPI 5.1% y/y vs forecast +4.6%
- Trimmed mean up 3.7% y/y vs forecast +3.4%
The trimmed mean is the RBA’s favoured measure, and they target a 2-3% inflation reading. Theoretically, a reading above 3% should lead to hikes, and a reading below 2% should lead to cuts. It’s never that simple, but that’s the primary condition to trigger the rest of the hike/cut debate. If inflation is inside the band, no action is the default.
With inflation at 3.7%, the RBA’s under pressure. Analysts have scrambled to update their rate hike forecasts, with many calling for a hike at the May meeting next week. Can they really wait longer with inflation way above the target band?
Not Just About Rate Hikes For AUDUSD
There’s plenty more to consider too. Global economic growth chief among them. As a commodity exporter, Australia benefits from a buoyant economy to sell into. Their strong trade relationship with China got them through the post-GFC era without entering a recession.
China’s Covid Zero/Lockdown policy has brought many regions to a standstill lately. However, early on Friday China announced new measures of economic support to back up Xi Jinping’s push for more infrastructure spending earlier in the week. The Australian dollar rallied in Asian hours.
The Aussie’s fate will depend on many factors in this evolving global economy. Nevertheless, the RBA meeting will be a key event on May 3rd..
Not investment advice. Past performance does not guarantee or predict future performance.