The Aussie dollar fell every day last week, losing about 1.5 cents despite the RBA rate hike. A resilient US dollar kept a lid on A$, adding to the focus on US CPI data this week. There will also be key Australian data, including Q3 wages and October employment.
The RBA raised its cash rate 25bp to 4.35%, a decision expected by almost all forecasters (including Westpac) and about 80% priced into money markets. Governor Bullock’s statement summarised the information received since the previous official forecasts in August as showing that “the risk of inflation remaining higher for longer has increased.” Both economic growth and inflation were higher than expected, inflation uncomfortably so.
This reasoning was widely expected but markets reacted to a surprise change in the wording of the closely watched final paragraph, from “some further tightening of monetary policy may be required” (used for the past 6 meetings) to “whether further tightening of monetary policy is required.” This change obviously doesn’t close the door on another hike but it was enough to leave AUD/USD down about half a cent on the day, at 0.6435.
The Aussie’s underperformance on many cross rates is surprising given that money markets continue to price considerable risk of further RBA tightening, in contrast to major central banks. A 5 December hike is widely viewed as a low probability given the limited data before then. But a further 20bp (80% chance of a hike) is priced by May 2024. So on short-end yield spreads, the Aussie’s support is still much improved over the past few weeks.
The Aussie extended its decline on Wednesday and especially Thursday when the US dollar posted sharp gains. The main catalyst was a speech by Fed chair Jerome Powell. He said that “we are not confident that we have achieved” a sufficiently restrictive monetary policy setting to return inflation to the 2% target. Powell’s remarks prompted a bounce in US yields, part of a sizeable gain for the week – the 2-year Treasury note yield rose from 4.84% to 5.06%.
We will hear plenty more from Fed officials this week, but not from Powell. The US focus will be on key October data – the consumer price index and retail sales. CPI is most market-sensitive, with consensus 3.3%yr versus 3.7%yr in September but CPI ex-food and energy unchanged at 4.1%yr.
Australia’s data calendar is very crowded. Westpac-MI November consumer sentiment will show the public response to the RBA’s Melbourne Cup Day rate rise. The Q3 wages survey will capture the July jump in the minimum wage. Westpac looks for 1.3%qtr, 3.9%yr, up from 3.6%yr in Q2. The report will be perused for indicators of wage pressures outside the award wages jump.
In its November statement, the RBA said that “Conditions in the labour market have eased but they remain tight.” In October, Westpac expects a 25k rebound in employment after the soft 7k gain in September. We look for the unemployment rate to remain at 3.6%, while softness in hours worked will also be monitored. As always, there is plenty of room for surprise in this report so AUD will be on edge.
The Aussie’s commodity price support remains mixed. The LME base metals index slipped -1.3% over the week, to be just 1% above year-to-date lows. Crude oil prices hit lows since July, some analysts blaming worries over China’s growth prospects. But iron ore rallied another 3.9% to $127/tonne, reaching highs since March and a long way above Australia’s federal budget assumptions.
The slide in US equities last Thursday coincided with a sharp fall in the Aussie, though equity weakness is often also correlated with a rise in US yields so it can be hard to assess which is impacting the A$ more. It may be in the week ahead that the US equity/rates nexus determines whether AUD/USD tests the bounds of its November range of 0.6318-0.6523.
Event risk
Singapore holiday (Mon), Aust Nov Westpac consumer sentiment, Oct NAB business confidence, Germany Nov ZEW investor sentiment, UK Sep average earnings, US Oct CPI (Tue), Aust Q3 wage price index, Japan Q3 GDP, China Oct retail sales, industrial production, UK Oct CPI, US Oct retail sales (Wed), Aust Oct employment (Thu), UK Oct retail sales (Fri)
