Australian Dollar to rally further?

The Aussie’s had a tough time of it over the past year. The AUD peaked in February 2021, before a combination of a strong USD, Covid policy difficulties, and fears that China’s property bust would destroy the commodity demand (that Australia’s economy benefits from) have weighed the Aussie down.

From the peak just above 0.80 AUDUSD traded just below 0.70 at the end of January and has since staged a sharp recovery. Desk chatter has moved on from the strong USD narrative with a sense that US outperformance has now faded and the rest of the world will catch up (or the Us will catch ‘down’).

Another big driver is relative central bank moves. While some central banks, including the Bank of England & the Federal Reserve, have pushed ahead with monetary tightening and hawkish rhetoric, the RBA stayed on Easy Street.

Until now…

QE ends February 10th

The RBA is moving on from emergency settings. Although they still seem to be in no rush to hike rates, the tone is markedly different.

Governor Lowe gave the annual ‘Year Ahead’ speech to the National Press Club & highlighted how much healthier the Australian economy is vs projections from a year ago.

• Unemployment rate 4.2% vs the official forecast of 5.5%
• Wage growth estimated at 2.25% vs 1.75%
• GDP growth will be around 5% compared to 3.5% forecast
• Headline inflation at 3.5% vs forecast of 1.5%
• Underlying inflation 2.6% vs forecast of 1.5%

That puts the underlying inflation firmly in the centre of the RBA’s target range, but wage growth still isn’t strong enough.

Lowe said:

"We have a unique opportunity here to get people into jobs and get their incomes growing more quickly, and we can do that without running an unacceptable risk on inflation," "The Board has made the judgment that is an appropriate trade-off."

After years of subpar wage growth (and no rate increases since November 2010!), the RBA sense the opportunity is too good to miss.

However, they are attentive to the risks, and for the first time they see clear scenarios which would require rate hikes at some point in 2022.

Wage growth is likely the largest influence now. Analysts at Westpac noted that the Wage Price Index was an imperfect tool so “other high frequency measures of wage pressures should be used while the momentum of the WPI Index should also be taken into account rather than relying on the annual print which was going to be impacted by base effects”

Governor Lowe said they’ll be paying attention to a broader range of wage measures, implying that the WPI is not the only data point to monitor.

Back to the chart, the AUDUSD price action does seem to indicate that a further rally wouldn’t be out of the question:

The 200 day moving average sits around 0.74, and price has just extended beyond the first key resistance level…

Not investment advice. Past performance does not guarantee or predict future performance.