The week that was & the week ahead

The week that was       

The Aussie dollar has lifted back to around 80 US cents and if you believe some of the more upbeat currency analysts, it is set to move higher against the US dollar through 2018. Strength in commodity prices, expectations for interest rate hikes in Australia and a growing concern about the US budget deficit as the Trump tax package rolls out have sparked the Aussie dollar surge.

But it is important to note that the bulk of the Aussie dollar buoyancy is a function of US dollar weakness, not locally inspired strength. Against the Euro, for example, the Aussie dollar has been floundering over the past 12 months, dropping from around 0.72 to 0.65, which is a sharp 10 per cent decline. A large part of this currency move relates to a material improvement in the Eurozone’s economic fundamentals which has seen the Euro rise against most major currencies.

All of which means the Aussie dollar ‘surge’ to 80 US cents is somewhat misleading. Against other major currencies, the picture is not quite as upbeat.


The week ahead

The December quarter consumer price index is the proverbial blockbuster data release on Wednesday. With the market pricing in two interest rate hikes by the middle of 2019, the momentum on inflation will be key to determining if such expectations are valid.

Inflation has been remarkably low over the last two and a half years. Another low result (say 0.5 per cent or less for underlying inflation for the quarter) would push back interest rate hike expectations. With the December quarter inflation data, higher petrol prices by themselves are set to add around 0.25 per cent to the headline result. When this one-off is stripped out of the result to get the underlying inflation rate, it is likely that annual inflation will remain below 2 per cent, to yet again be below the bottom of the RBA target range.

Will the RBA hike rates when inflation is persistently below the bottom of its target? Don’t bet on it.

Source: RBA