After hitting a six-month low midweek, the Australian dollar produced a remarkable comeback heading into the weekend. The manipulation of the US dollar continued to be the dominant driver, but the RBA meeting on Tuesday could add some volatility from within Australia.
Friday’s resolution of the US debt ceiling crisis sent a collective sigh of relief to the markets. The Australian dollar, which is tied to economic growth, joined the rest of the risk asset market in rising prices.
Despite Tuesday’s disappointing reading of a drop of 8.1% in building approvals compared to the lift of 2% expected and 1.0% previously, inflationary pressures within the banking system continue to raise concerns.
Monthly CPI figures covering 62-73% of the weighted quarterly basket are released by the Australian Bureau of Statistics (ABS). The quarterly number is tied to the RBA’s legislated aim of 2% to 3% across the cycle.
The RBA referenced the monthly CPI metric when they paused the raising cycle earlier this year, despite concerns about the gauge’s reliability ever since it was adopted last year. When they meet again to set interest rates on Tuesday, they might finally admit it.
Despite earlier projections of 6.4% and 6.3%, the annual rate of CPI rose again in April, coming in at 6.8%.
The RBA’s predicament will further worsen this Friday when the Fair Work Commission announces its verdict on the annual wage review. It resulted in a 5.75 percent rise in the base salary for all new awards. This was a lot more than the 5% increase that was anticipated. The new rule will go into effect on July 1, 2023.
While this may seem like the fair thing to do, it actually increases consumer purchasing power and speeds up the wage-price spiral.
In April, private sector lending in Australia grew by 0.6% month-over-month, above expectations of 0.3% growth.
Last week, RBA Governor Philip Lowe testified before the Senate Economics Legislation Committee, where he discussed the challenges of reducing inflation while wage growth remains strong.
The likelihood of a rate increase on Tuesday is minimal, according to market expectations. There may be good reason to tighten things up even more.
In other rate news, the benchmark 2-year bond spread hit 105 basis points (bp) in favour of the ‘big dollar’ at the beginning of last week, but it has since shrunk to roughly 70 bp, coinciding with the rise in AUD/USD.
The AUD/USD exchange rate may remain under the control of the interest rate disparity, but a surprising slant from the RBA might spark some movement in the currency.
AUD/USD AGAINST AU-US GOVERNMENT BOND SPREADS OF 2 AND 10 YEARS
AUD/USD CHART
The AUD/USD pair broke out of the 0.6565 – 0.6818 range it had been in for three months on its way to a 6-month low of 0.6458 last week.
On Thursday, a Bullish Engulfing Candlestick formation was formed, which could imply a bullish turnaround.
Support may be found at the breakpoints of 06574 and 0.6565, as well as the recent low of 0.6458.
Support may be found further down at the previous low of 0.6387 and the nearby Fibonacci level of 0.6381. The latter is the 78.6% Fibonacci Retracement of the advance from 0.6170 to 0.7158.
Resistance on the upside could be found at the breakpoints and prior peaks of 0.6675 and 0.6710. Further up, the 0.6780 – 0.6820 range could provide a more substantial resistance zone, since it contains numerous former highs and breakpoints.
