Australian Dollar Outlook: US Dollar Crunch Boosts Aussie

Australian Dollar Forecast: Neutral

• The Australian Dollar jumped higher as the US Dollar sank
• A soft US CPI number saw risk assets soar across the board
• RBA disparity with the Fed approach might deliver different results

The Australian Dollar bounced to its highest level in almost two months last week on the back a weaker US Dollar after US CPI printed below forecasts. Headline CPI was 7.7% year-on-year instead of 7.9% forecast and 8.2% previously.

The ultra-aggressive rate hikes by the Federal Reserve so far this year might be bearing fruit for the central bank in their fight against inflation.

The consequence is that the market now has hopes that the tight monetary policy in the US may not crush the economy while reining in price pressures.

The swaps and futures markets both have a 50 basis point hike priced in for the Federal Open Market Committee (FOMC) meeting next month, as they did prior to the CPI number.

The key difference now is the expectations of where the terminal rate might be. This is the rate at which the current hiking cycle will peak. If inflation can continue to trend lower, the terminal rate could be lower than previously anticipated.

The deceleration in US inflation is in contrast to the latest CPI data in Australia, where an acceleration has been noted.

The vigorous front-loading of rate hikes by the Fed in this tightening cycle might pay dividends in the long run if the flames of inflation are hosed down sooner rather than later.

Conversely, the RBA’s slower pace of rate hikes as compared to the Federal Reserve has raised speculation that the cash rate in Australia may end up being higher and remain there for a longer period of time.

This perspective is based on the terminal rate being higher than what would otherwise be the case if the RBA had remained more hawkish. The RBA will meet on the first Tuesday in December and then their next meeting will not be until February 2023.

Outside of monetary policy, commodity markets also got a lift from the weaker US Dollar and the hopes of China re-opening have been somewhat dashed. They have reported the most Covid-19 cases there in six months.

Looking at the week ahead, both Australia and the US will see retail sales numbers and the US will also get PPI data. A strong PPI read could challenge the notion of a Fed pivot.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter