The AUDUSD has been trending higher for about a month at this point, but a substantial amount of that could be attributed to events outside of Australia. The latest data releases give reasons to expect a stronger Aussie, but the actions from the RBA in the recent past give reasons for a weaker currency. How to match these differences?
Rewinding a bit
A couple of days ago, the RBA released its minutes from the last meeting. This was when it caught the market by surprise by raising rates less than expected. What got a lot of attention was the reason: Worries about liquidity. This happened in the wake of the BOE having to step in to support the bond market after the disastrous mini-budget.
Australian inflation has been climbing over the last year, but not at the same rate as in other major economies. Granted, Australia only keeps track of inflation on a quarterly basis, but the rate isn’t really near the double digits of the UK and the EU. Nor has the RBA been as aggressive as the Fed in getting inflation to come back down.
Where policy is heading
The concerns about liquidity stem from real yields being really low, particularly in the UK. Subtracting the loss of value due to inflation from the interest paid on debt, investors end up fairly in the negative. Meaning there is little interest to buy into debt, particularly longer term debt when there is uncertainty about how the government will make its payments.
Australia, as a commodity currency, usually attracts investor interest with relatively high interest rates. But real rates are substantially negative for the moment. Interest rates in the most recent bond auctions have actually come down, likely as a result of expecting inflation to be controlled in the future. This causes a particular problem for the RBA, because it means that people might be looking to stay out of the market for a short period of time, pending inflation coming under control. But if the RBA raises rates aggressively, they could face a liquidity problem in the short term, similar to the UK.
Threading the needle
Yesterday’s wage price index came in above expectations, showing that inflationary pressures have started to filter through to wages. That is something concerning for the central bank as that can keep pushing prices higher despite monetary policy.
From the minutes of the RBA meeting, it shows that the board considered both 25bps and 50bps options, and that there is no pause. 50bps is still on the table. In other words, the final rate is likely to be unchanged, just the pace at which the RBA gets there. This helps alleviate some of the liquidity pressure in the short term, but helps anchor expectations that inflation will come down.
What to look out for
Tomorrow’s employment figures are likely to be important in the context of labor tightness. If there is sufficient room to keep hiring employees, then wage pressure on inflation is likely to be less. Which could give the RBA more room to go for 50bps at their next meeting.
Australia’s October unemployment rate is expected to remain steady at 3.5%, after adding 15K jobs, up from 0.9K in September.
