Australian Dollar Outlook: A Sinking US Dollar Floats All Boats

10 and one 10 us dollar bill

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Australian Dollar Forecast: Neutral

  • The Australian dollar found firmer footing on US dollar debility.
  • The Fed look likely to raise rates by less than 75 bps while the RBNZ are adopting those rates.
  • The RBNZ might know something that the RBA doesn’t. Will it sink the AUD/NZD pair?

The Australian dollar surged toward a two-month high at the end of last week as the US dollar collapsed on the market perception of a change in Federal Reserve policy. Federal Open Market Committee (FOMC) meeting minutes revealed what astute observers already knew. That is, ongoing rate hikes appear likely to be less than the four 75 basis point (bps) lifts seen previously.

The short-term interest rate market continues to price in a 50 bps bump up at the December Fed gathering. This hasn’t changed from prior to the last meeting. Nonetheless, the market interpreted the minutes as a dovish tilt and the US dollar followed long-end Treasury yields lower.

Across the ditch, the Reserve Bank of New Zealand (RBNZ) re-accelerated their rate hiking program, adding 75 bps to their official cash rate (OCR) last Tuesday, which is now 4.25%. They had been consistently lifting by 50 bps previously.

Their action followed a surge in inflation, with the latest print coming in at 7.2% year-on-year to the end of the third quarter. The bank has an inflation target band of 1-3%. In contrast, the Reserve Bank of Australia have pared back their hawkishness. They raised the cash rate by only 25 bps at the October and November monetary policy meetings to get to the current 2.85%.

This is instead of the 50 bps that they had been doing in June, July, August, and September. The latest inflation data showed an acceleration to the end of the third quarter. The RBA is now dealing with 7.3% year-on-year price pressures. The bank has an inflation target band of 2-3%.

The relative dovishness from the RBA compared to the RBNZ has seen the AUD/NZD currency pair slide to an eight-month low. The RBA appear to be comfortable that they have inflation under control. The Fed had similar thoughts through to the end of 2021, and are staring at a “Volcker-style solution” where the economy has to be slowed significantly in order to contain inflation.

In the week ahead, the Australian Bureau of Statistics (ABS) will release their first monthly CPI numbers. There will be two such releases between the quarterly figures. This print will cover 62-73% of the weighted quarterly basket. More details can be read here.

Technical Analysis: AUD/USD, AUD/NZD, & NZD/USD


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