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AUD Steady Ahead of Inflation, FOMC and Trade Talks

The Australian dollar was little changed on Tuesday despite what should be AUD-supportive remarks from an RBA board member. The Aussie remains subdued ahead of important inflation data, a Fed meeting and a second round of trade talks between the US and China.

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Holders of Australian dollars were left relieved on Tuesday after RBA board member Ian Harper said he expects the next move in Australian interest rates to be up.

In recent months, investors have become increasingly pessimistic on Australia’s economic outlook: Capital Economics predicted earlier in January that the RBA would be forced to cut its cash rate by 50 basis points to a record low on what it expects to be further deterioration in the Australian housing market and a Chinese economic slowdown, and experts at Radobank said much the same. In percentage terms, forecasters at both groups are predicting a double-digit decline in the Aussie’s buying power this year.

“Everything I’ve seen shows that [the domestic economy] is still strong,” Harper told the Wall Street Journal.

The Australian dollar is, however, showing little interest in policymaker biases ahead of hard data to be released on Wednesday morning. At rates of US$0.715, €0.626 and £0.519, the Aussie is largely unchanged (slightly lower) on the day.

Concerns are heightened ahead of Wednesday’s inflation data. Per the market’s estimate, the Australian Bureau of Statistics will say that consumer prices rose in the December quarter by 0.4 percent, but this is doubted by Westpac—a bank with an excellent track record when it comes to inflation forecasting.

Westpac expects quarterly inflation worth 0.3 percent, which will take annual inflation to 1.5 percent, from 1.9 percent—well down on the RBA’s 2-3 percent target.

Measures of underlying inflation will also slip, Westpac believes. Inflation excluding the top 30 percent most volatile items—the so-called “trimmed mean” measure—will slip to a quarterly rate of 0.3 percent and to an annualized 1.6 percent.

This week is an important one for currency markets, and an inflation miss on Wednesday should keep the Australian dollar under pressure until the FOMC policy announcement and press conference later in the day.

Also on the economic calendar this week is US payrolls data (Friday), but for the Australian dollar, of equal importance is a second round of trade talks between Washington and Beijing, which take place on Wednesday and Thursday.

Trade tensions between the world’s two largest economies are threatening the outlooks for Chinese and global growth, and also for Australia’s currency given the Australian economy’s reliance on commodity sales to China.

 

Further Reading

 

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Posted to: News

 
 
Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.
 

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