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Australian Dollar’s Woes Continues

The Australian dollar is in negative territory in North American trade. Currently, AUD/USD is trading at 0.7190, down 0.50% on the day.

RBA unlikely to follow RBNZ tightening

The RBNZ made good on its promise and raised interest rates earlier today by 0.25%. This brings the cash rate to 0.75%, and the bank is projecting that rates will reach 2% in 2022. This tightening in policy, which started in October, is unlikely to be followed in Australia. Both countries are heavily dependent on trade, and the Australian and New Zealand dollars have fallen sharply in November (NZD is down 4.05% and AUD 4.36%), as risk appetite has waned and the US dollar is showing newfound strength.

As far as monetary policy, the RBA can afford to be much more dovish than the RBNZ. For one thing, Australia’s inflation is comfortably within the RBA’s 1-3% target, although there are inflationary pressures. In New Zealand, inflation is red-hot and is threatening to overheat the economy. Currently, inflation is running at 4.9% y/y and the RBNZ is projecting that inflation will accelerate to 5.7% in Q4. The RBNZ does not have the luxury of ignoring these numbers and has embarked on a series of rate hikes which will last into 2022, with rates expected to rise to 2.0%.

The RBA, however, can afford to sit on the fence, and Governor Lowe continues to insist that the bank will not raise rates before 2023, or possibly 2024, saying the bank is prepared to be patient. Many analysts believe that Lowe will have to act hike earlier if wages reach the RBA’s target of 3% faster than the RBA is anticipating. The markets have been much more hawkish than Lowe, and have priced in three rate hikes in 2022, despite the pushback from Lowe. With inflation on the rise and the Australian dollar falling, it will be interesting to see if the RBA brings forward its guidance in the coming months.

AUD/USD Technical

  • There are resistance lines at 0.7328 and 0.7422
  • AUD/USD is testing support at 0.7184. Below, there is support at 0.7134

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