RBA at a glance as commodities fade. Where to find AUD / USD?
AUSTRALIA DOLLAR FORECAST: NEUTRAL
- Aussie dollar rallied as RBA gained a foothold on bond yields
- Commodities Undermined AUD Bullish Trend With Addition Of Energy Supply
- There is a struggle between yields and commodities. Can AUD / USD Break?
Australian bond yields have exploded higher this week. This was on the heels of the trimmed average CPI reading for the third quarter topping expectations. This would normally support the Australian dollar. However, as interest rates rose north, commodities rose south and the Aussie found itself at a crossroads.
The RBA appears to have given up on maintaining the interest rate on the Australian Commonwealth Government bond of April 2024. The central bank had previously targeted 0.10% for this bond. If so, it is indeed a rate hike. At the end of the week, it is trading above 0.80%.
The RBA monetary policy meeting takes place on Tuesday. Globally, central banks have recently become more hawkish than they ever were before. With inflation on the rise in most parts of the world, central banks appear to have shifted their focus from post-pandemic growth to tackling indomitable prices.
After comments from Federal Reserve Chairman Jerome Powell during the week, the idea that this inflation surge is transient appears to have been scrapped. Supply chain bottlenecks continue to weigh on global trade.
One problem for policymakers is that producer price inflation (PPI) indicators are at very high levels. This leaves companies the choice of either increasing the prices paid by consumers or reducing profitability, or a combination of these. The annual Australian PPI was released on Friday and stood at 5.3% at the end of September, above the forecast of 5.0%
For the Australian dollar, it’s a relative interest rate battle. The RBA appears likely to make a monetary policy adjustment Tuesday afternoon local time. Then the Federal Reserve will end its FOMC meeting some 38 hours later. The gap in timing could see AUD / USD volatility and depending on the aggressiveness level of the RBA, could be AUD positive.
Commodity prices are also likely to play a role for the AUD / USD and may offset favorable interest rate differentials for the Australian dollar. Energy and metals commodities fell over the week, but stabilized over the weekend. There have been a number of positive headlines in favor of increased energy supply, but prices have remained relatively high. Structural problems in the energy sector are still relevant today.
After Tuesday’s RBA meeting, Australian building permits and the trade balance will be released on Wednesday and Thursday, respectively.
AUD / USD AGAINST AUSTRALIA-US 10-YEAR YIELD GAP AND IRON ORE
Graphic vscreated in TradingView
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter