10-month lows in view as Australian Dollar retreats

December Fed rate hike bets rise on hawkish commentary, lifting the US Dollar and weighing on AUD/USD.
5.3% is Australia’s Consumer Inflation Expectations reading for November. Unchanged from the previous month, it remains the highest since June.
Expectations that the RBA will leave interest rates unchanged for the foreseeable future weigh on the Australian Dollar.

AUD/USD trades around 0.6840 in Thursday’s Asian session. A third consecutive daily decline takes the pair close to 10-month lows. Supporting the US Dollar (USD) is an increasingly hawkish outlook for Federal Reserve (Fed) policy.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A December rate hike has attracted stronger market bets since US Consumer Price Index (CPI) inflation exceeded expectations. Those bets gained further traction after Fed Governor Christopher Waller said earlier this week that he would support a quarter-point increase, or even a half-point move should inflation deteriorate. The CME FedWatch Tool puts the market-implied probability of a December rate hike at around 87%, with a nearly 13% chance of a larger 50 basis point increase.

At 5.3% in November, Australia’s Consumer Inflation Expectations matched the previous month and stayed at their highest since June. The elevated reading follows September’s acceleration in headline inflation to a six-month high of 4.3%. Inflation remains well above the Reserve Bank of Australia’s (RBA) 2–3% target range.

Persistent price pressures have not prevented growing market speculation that the RBA’s tightening cycle is over. Expectations that rates will remain unchanged for the foreseeable future are creating headwinds for the Australian Dollar (AUD). Further out, roughly 28 basis points of RBA rate cuts in 2027 are priced into markets, according to Prime Terminal data.

Higher bond yields pressure Australia’s leveraged housing market

Interest-sensitive sectors are starting to feel the latest rise in global bond yields, Societe Generale strategists warn. They note that “the rise in bond yields, however, is feeding through to leveraged housing markets, and Australia is certainly one of them.” Their assessment adds to concerns over the particular vulnerability of Australia’s highly indebted households and housing market to rising funding costs.

Australian Dollar: Key Questions

Australian Dollar: which drivers matter most?

Interest rates set by the Reserve Bank of Australia (RBA) are among the strongest influences on the Australian Dollar (AUD). Australia’s resource wealth also makes the price of its largest export, iron ore, a key driver. Other influences include economic conditions in China, Australia’s largest trading partner, alongside domestic inflation, economic growth and the trade balance. Investor sentiment matters too: demand for riskier assets in a risk-on market supports AUD, while a risk-off market sees investors seek safe havens.

RBA policy: how does it affect the Australian Dollar?

By setting the interest rate at which Australian banks can lend to one another, the Reserve Bank of Australia (RBA) affects the Australian Dollar (AUD). That rate feeds through to borrowing costs across the economy. The RBA’s primary objective is to keep inflation stable at 2-3%, raising or lowering interest rates to achieve this. Rates that are relatively high compared with those of other major central banks support AUD; relatively low rates have the reverse effect. Quantitative easing and quantitative tightening provide additional ways to influence credit conditions. Easing is negative for AUD, while tightening is positive.

China’s economy: why does it matter for the Australian Dollar?

As Australia’s largest trading partner, China has a significant influence on the Australian Dollar (AUD) through its economic performance. A strong Chinese economy buys more Australian raw materials, goods and services. This increases demand for AUD and lifts its value. When Chinese growth falls short of expectations, the reverse applies. Chinese growth figures that surprise on either side of expectations therefore often directly affect the Australian Dollar and its currency pairs.

Iron ore prices: how do they influence the Australian Dollar?

At $118 billion annually, according to 2021 data, iron ore is Australia’s largest export, with China its main destination. Its price can consequently influence the Australian Dollar. Rising iron ore prices generally increase aggregate demand for AUD and lift the currency; falling prices have the opposite effect. Higher prices also tend to increase the likelihood of an Australian trade surplus, providing another source of support for AUD.

Trade balance: what does it mean for the Australian Dollar?

Export receipts minus import spending make up a country’s trade balance, another influence on the Australian Dollar’s value. Strong overseas demand for Australian exports can lift the currency when demand from foreign buyers exceeds Australia’s spending on imports. A positive net trade balance therefore strengthens AUD, while a negative balance has the reverse effect.