Australian Dollar holds firm on hawkish RBA stance, softer US Dollar
- The Australian Dollar trades flat against the US Dollar near its highest level in more than three months.
- RBA Deputy Governor Hauser keeps the door open to additional policy tightening.
- US inflation data could decide whether the Fed raises interest rates next week.
AUD/USD holds firm on Tuesday as the US Dollar (USD) struggles to gain traction, while the Reserve Bank of Australia’s (RBA) hawkish stance further supports the Australian Dollar (AUD). At the time of writing, the pair trades around 0.7220, rising for a fifth consecutive day and hovering near levels last seen in mid-May.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 98.82 near its lowest level in more than two weeks after briefly reclaiming the 99.00 mark. The Greenback strengthened alongside Oil prices earlier in the day as traders reacted to attacks on Saudi energy facilities.
However, the pair’s advance lacks strong follow-through, with neither the Australian Dollar nor the Greenback attracting aggressive buying. Traders appear reluctant to take large positions ahead of this week’s US inflation data, which could prove pivotal in deciding whether the Federal Reserve (Fed) delivers a rate hike next week.
The New York Fed’s latest Survey of Consumer Expectations showed a slight decline in inflation expectations. One-year expectations eased to 3.58% in August from 3.63%, while the three-year measure fell to 3.2% from 3.3%. Five-year expectations were unchanged at 3.0%.
Expectations of a Fed rate hike increased after Friday’s stronger-than-expected US employment report eased concerns about the labour market. Higher Oil prices add to inflation risks and strengthen the case for tighter policy. According to the CME FedWatch Tool, markets see around a 60% chance of a 25-basis-point rate hike at the September 15-16 meeting.
On the Australian side, the RBA has raised interest rates three times this year and could tighten policy again at its September 28-29 meeting. Speaking on Tuesday, RBA Deputy Governor Andrew Hauser said, “The question for us is whether we have done enough on rates or need to do more.” He added that there is “much to like about the economy, but inflation is a major issue.”
Strategists at Brown Brothers Harriman highlight that Australia’s inflation and growth data are running ahead of the RBA’s projections, reinforcing the case for further policy tightening. They note that “Australia's trimmed mean CPI held at 3.6% y/y in July, above the RBA’s 3.3% year-end forecast. Meanwhile, real GDP growth reached 2.1% y/y in Q2, beating the RBA’s 1.9% forecast.”
In their view, “the data supports the case for a 25bps hike to 4.60% on September 29 (70% priced-in),” though they caution that “the RBA could wait until November 3, allowing it to assess both the August and Q3 CPI prints on September 30 and October 28, respectively.” More structurally, BBH adds that “Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
