Key Highlights
- The Australian Dollar has gained strength against the US Dollar today due to market weakness.
- Although the Consumer Price Index is the main focus for tomorrow, the Producer Price Index on Friday could also have an impact.
- With China on holiday, the commodity market remains strong. Will this lead to a new high for the AUD/USD exchange rate?
The Australian Dollar is making a strong push towards the five-month high of 0.7063 that it reached last week, as the US Dollar continues to be affected by broader market pressures.
Recent statements from members of the Federal Reserve have indicated that they believe a pace of 25 basis point hikes will be appropriate for upcoming Federal Open Market Committee (FOMC) meetings.
The interest rate markets as well as the futures are currently predicting such lifts at the February and March meetings, but there is less certainty about higher rates beyond that.
This perception that there may be an end to restrictive policy has had a positive effect on equity markets and weakened the US Dollar.
On the domestic front, tomorrow’s much-anticipated quarterly Consumer Price Index (CPI) data will be closely examined for insights into the Reserve Bank of Australia’s rate decision on February 7th.
As the market eagerly awaits the release of the Consumer Price Index (CPI) data, the futures market is currently showing mixed signals, with a 14 basis point increase in the cash rate priced in.
However, it’s unclear whether the Reserve Bank of Australia (RBA) will choose to raise the rate by 25 basis points, leave it unchanged or make a different decision.
A Bloomberg survey of economists has predicted that the Q/Q CPI will decrease from 1.8% to 1.6%, while the Y/Y read is forecasted to increase from 7.6% to 7.8%. This apparent discrepancy can be explained by a decline in Q4 of 2021.
This means that the fourth quarter of 2021 has a lower number, which is not included in the calculation of the Y/Y read, hence the difference between the Q/Q and Y/Y predictions.
It’s important to note that the RBA closely monitors inflation, and the CPI data will be an important factor in the RBA’s decision-making process.
The central bank has a mandate to target 2-3% over the business cycle, and the release of this data will give insight into whether the economy is on track to meet this target.
Additionally, other economic indicators such as the Producer Price Index (PPI) and the labor market conditions will also be taken into consideration.
Businesses that are facing higher costs at the farm and factory gate have two choices. They can absorb the increases in costs and take a hit to earnings, or they can try and pass on the price rises to consumers.
With the unemployment rate remaining low at 3.5%,businesses could pass these costs to consumers in order to stay afloat and maintain their profit margins.
China Lunar Holiday
Moreover, while China is on holiday this week for Lunar New Year celebrations, the re-opening of the economy nonetheless continues to affect the commodity markets.
Most of Australia’s commodities have had price increases since China relaxed its Covid-19 rule and this may impact the AUD/USD.
Additionally, the market sentiment, global geopolitical events and the overall economic conditions around the world also influence the AUD/USD exchange rate.
Therefore, it will be a combination of domestic and international factors that will ultimately determine where the AUD/USD exchange rate goes.
Copper, Gold, AUD/USD, Iron Core and DXY/USD Index
The AUD/USD exchange rate, as well as the prices of key commodities such as copper, gold, and iron ore, and the performance of the US Dollar Index (DXY), are all closely watched by traders and investors as they offer insights into the current economic conditions and can potentially indicate future trends.
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