Australian Dollar gains on hawkish RBA outlook, Warsh speech in focus
- The Australian Dollar extends its advance as hotter-than-expected inflation strengthens RBA rate hike expectations.
- Hawkish RBA expectations contrast with steady Fed rate expectations for September.
- Traders await Fed Chair Kevin Warsh’s Jackson Hole speech for fresh clues on the US interest rate outlook.
The Australian Dollar (AUD) outperforms its major peers on Thursday, buoyed by hawkish Reserve Bank of Australia (RBA) expectations after Australian inflation data released on Wednesday surprised to the upside. A softer US Dollar (USD) provides additional support. At the time of writing, AUD/USD trades around 0.7197, at levels last seen in mid-May.
The stronger-than-expected inflation figures have reinforced expectations that the RBA could raise interest rates as soon as September. The central bank left the cash rate unchanged at 4.35% at its August meeting after three increases earlier this year, but warned that inflation is likely to stay elevated for some time and that risks to the inflation outlook remain tilted to the upside, particularly due to higher Oil prices amid tensions in the Middle East.
Reuters reported on Thursday that three of Australia’s four major banks now expect another RBA rate hike this year. NAB forecasts a 25-basis-point (bps) increase in September, while Commonwealth Bank and ANZ expect the next move in November. Westpac, meanwhile, expects rates to remain unchanged.
On the US side, the latest PCE inflation data released on Wednesday failed to alter expectations for the Federal Reserve’s (Fed) September meeting. Although headline PCE came in above forecasts, traders focused more on the core reading, which was in line with expectations. The CME FedWatch Tool shows around a 62% chance that the Fed will leave interest rates unchanged next month.
As a result, the Greenback struggles to attract strong buying interest and remains in consolidation mode ahead of Fed Chair Kevin Warsh’s speech at the Jackson Hole Symposium on Friday. The event could provide fresh clues on the Fed’s interest rate outlook and offer the next directional catalyst for AUD/USD. In the near term, diverging RBA-Fed policy expectations are likely to keep the Australian Dollar supported.
On Friday, traders will also keep an eye on the preliminary Nonfarm Payrolls (NFP) benchmark revision, along with the University of Michigan Consumer Sentiment, Consumer Expectations and inflation expectations data.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
