Australian Dollar Outlook: The RBA Might Surprise Doves

The Australian Dollar has been whipped around by US Dollar moves

The RBA have their work cut out for them in the coming days as pressures build

Interest rate differential might be the driving force. Higher AUD/USD?

Topic

The rise of the Australian dollar

AUD/USD-CHART

The rise of the Australian dollar

The Australian Dollar staged an outstanding rally going into the weekend after making a six-month low mid-week. Once again, US Dollar machinations dominated proceedings,

but domestic factors might provide some volatility with the RBA meeting this Tuesday.

Markets in general breathed a sigh of relief with the US debt ceiling issue having been resolved on Friday.

Risk assets across the spectrum gained and the growth-linked Aussie Dollar joined the party.

While building approvals came in soft on Tuesday, falling 8.1% against a lift of 2% anticipated and 1.0% prior,

there are growing alarm bells for inflationary pressures within the financial system.

The Australian Bureau of Statistics (ABS) publishes a monthly CPI figure that covers 62-73% of the weighted quarterly basket. The RBA’s mandated target of 2 – 3% over the cycle is linked to the quarterly figure.

The reliability of the monthly CPI measure has been questionable since it was introduced last year but nonetheless,

the RBA cited it when they hit the pause button on the hiking cycle earlier this year.

They may acknowledge it this Tuesday when they meet again to decide on rates.

Year-on-year CPI reaccelerated to 6.8% to the end of April according to the monthly gauge,

well above forecasts of 6.4% and 6.3% prior.

Compounding the dilemma for the RBA is the Fair Work Commission’s annual wage review decision on Friday.

It delivered an increase to the minimum wage in all modern awards by 5.75%.

This was above general perceptions of a 5% rise.

It will take effect from the 1st of July 2023.

While there is a sense of fairness to the outcome,

it effectively gives consumers more capacity to pay for goods and services,

further swelling the price-wages spiral.

Adding to

the case for a hawkish RBA decision,

Australian private sector credit for April showed growth

of 0.6% month-on-month against the 0.3% expected.

RBA Governor Philip Lowe appeared before the Senate Economics Legislation Committee last week

and noted the difficulty of getting CPI down while wages are rising at the pace that they have been.

The interest rate market is pricing a low probability of a hike on Tuesday.

It seems that there might be a strong case for more tightening.

Elsewhere on the rates front,

the benchmark 2-year bond spread went to 105 basis points

(bp) in favour of the ‘big dollar’ at the start of last week,

but it has since contracted to around 70 bp at the same time that AUD/USD saw an uptick.

AUD/USD-CHART

AUD/USD broke out of the 0.6565 – 0.6818 range that it had been in

for 3 months on its way to making a 6-month at 0.6458 last week.

On Thursday a Bullish Engulfing Candlestick formation was created

and it may indicate a bullish reversal may evolve.

Support could be at the breakpoint of 06574 and 0.6565 or the recent low of 0.6458.

Further down, support may lie at the prior low of 0.6387 and

the nearby Fibonacci level of 0.6381.

The latter is the 78.6% Fibonacci Retracement of the move from the low of 0.6170 to the peak of 0.7158.

On the topside, resistance could be at the breakpoints and previous peaks of 0.6675 and 0.6710.

Further up, the 0.6780 – 0.6820 area might offer a more significant resistance zone

with several prior highs and breakpoints.

article name Australian Dollar Outlook

Australian Dollar Outlook

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