Aussie storms higher, RBA next

We continue to see significant volatility from the Australian dollar. Last week, AUD/USD plunged 2.51%, its worst week since mid-August. After three straight days of losses, the currency has roared back with gains of close to 1% and is back above the symbolic 0.70 level.

The RBA meets on Tuesday and is expected to maintain the Cash Rate at a record low of 0.10%. Still, it will be a significant meeting, as the central bank will wind up its QE programme after 15 months and also revise upwards its inflation forecast.

The Australian recovery continues to gather steam. The labour market has strengthened and inflation continues to rise, although not at the levels we’re seeing in the US and the UK. The unemployment rate has dropped to 4.2% and core CPI has climbed to 2.6%. These are good numbers, but not quite good enough to justify a rate hike in the eyes of the RBA. Governor Lowe has stated that he wants to see unemployment at 4.0% and inflation “sustainably” around 2.5% before he will press the rate trigger. The main factor restraining the RBA from a hike remains wage growth, which is around 2.2%. Lowe has said wages must rise to 3% before a rate move; otherwise, the rise in inflation is temporary.

The RBA had said it would not raise rates until 2024 but has been forced to bring forward its forecast, with unemployment falling and inflation rising more quickly than the bank expected. The most likely scenario is liftoff in the third quarter of 2022 and the markets hope to get more insight from Lowe at Tuesday’s meeting.

In the US, the Fed’s favorite inflation metric, the Core PCE Price Index, rose in December 4.9% y/y, up from 4.7% and above the forecast of 4.8%. This marks the highest gain since 1983 and reinforces expectations that the Fed will act aggressively to curb surging inflation. The markets have priced in five rate hikes in 2022, with the CME Group’s FedWatch pricing in a March hike of a quarter-point at 85%.

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AUD/USD Technical

• AUD/USD faces resistance at 0.7133. Above, there is resistance at 0.7271
• There is support at 0.6913 and 0.6831

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