Australian Dollar Nearing Five-Month High as Dollar Remains Weak

As the US dollar remains under pressure globally, the Australian dollar is heading toward the five-month high reached last week at 0.7063.

Recent remarks from Federal Reserve officials indicate that they currently believe increases of 25 basis points (bp) will be the proper rate of tightening at the Federal Open Market Committee’s (FOMC) next meetings.

The interest rate futures and swaps markets are planning for such increases during the February and March meetings, but they are less excited about higher rates after those dates.

The belief that future restrictive measures will stop has supported equity markets and hurt the US dollar.

Australian Dollar Traders to Keep an Eye on the RBA Decision

In Australia, the Reserve Bank of Australia’s rate decision on February 7 will be keenly examined in light of tomorrow’s dramatic quarterly CPI statistics. With a 14-bp hike in the cash rate priced in, the futures market is undetermined. Both 25 bp and “no change” are ambiguous.

According to a Bloomberg survey of experts, the headline Q/Q CPI is expected to decrease from 1.8% to 1.6%, while the Y/Y read is expected to increase from 7.6% to 7.8%. A lower quarterly number dropping out of the fourth quarter of 2021 explains the disparity.

While the RBA’s mandate to aim for 2 to 3% over the business cycle is focused on the CPI, the Producer Price Index (PPI) may also be important.

This Friday, PPI data will be announced, and if it has risen over the last quarter, it could cause issues for CPI this quarter. There are two options available to companies that are dealing with rising farm and factory gate costs.

They can either try to pass on the price increases to customers or absorb the cost increases and suffer a loss in profit. Profit-driven businesses would be eager to pass on their cost hikes and retain their margins given that the jobless rate is still hovering around multi-generational lows at 3.5%.