AUD Bounced Higher May Cause RBA To Take Action

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The Australian dollar’s value was boosted during the last week of October. This was due to the weaker US dollar and a stronger-than-expected local CPI reading. The RBA didn’t expect these factors.

The weaker US dollar was brought about by several factors last week. Central banks changed their pace in the hopes of ending the aggressive stance of the US Federal Reserve. 

Early in October, the RBA took a less aggressive approach when they raised the cash rate by 25 basis points (bps) instead of the forecasted fifty bps. The Bank of Canada (BoC) increased their overnight lending rate by 50 bps but was significantly lower than the predicted 75 bp increase.

On the local side, the Australian Commonwealth Government Bond (ACGB) yields shot up but eased up into the weekend along with the Treasury yields. 

The Australian CPI also came in hot mid-week, more than anticipated. This increased the RBA’s preferred measure, the ‘trimmed mean’, which caused concern.

Strategist Daniel McCarthy reports, “Headline CPI was 7.3% year-on-year to the end of the third quarter instead of the 7.0% forecast. The trimmed mean measure was 6.1% over the same period, rather than the 5.5% anticipated. The RBA has said they expected inflation to reach 8% toward the end of this year before easing in 2023. A problem for this scenario is re-acceleration as shown in the quarterly breakdown.”

McCarthy adds that the trimmed mean quarterly number was up 1.8% quarter-on-quarter for Q3, significantly higher than the expected 1.5% of the previous quarter. 

This will call for changes in reporting of the CPI data point; ABS will provide a monthly update between reports of the quarterly figure, which is the main inflation gauge.

China continues to affect the Australian economy in the Asia-Pacific region, with the Hang Seng Index at its lowest since 2009. 

Global Chief Investment Officer Mark Haefele also noted, “While Chinese politics have long been opaque, this sharp consolidation of power is adding to investor unease.”

This added to the Chinese market’s decline and the increasing political tension between Washington and Beijing.


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