Forecast for the Australian Dollar: Neutral

• The US Dollar halted the Australian Dollar’s ascent.

• Before the hawks got involved, prospects of a Fed turn were fueled by a lackluster US PPI.

• Despite solid domestic statistics, the dial only moved a little. AUD/USD: Will yields change?

The Australian Dollar made another attempt to climb last week, reaching a 2-month high of little less than 68 cents before retreating as the US Dollar regained the upper hand.

After a benign CPI report the week before and the US PPI missing predictions early in the week, the rise took place. As a result, there were market expectations that the Federal Reserve would end its rapid tightening cycle.

We heard from a succession of Fed Board members over the week, including Mary Daly, John Williams, Chris Waller, and Neel Kashkari.

Before St. Louis Fed President James Bullard, the leading supporter of the rate increase brigade, they all reiterated the hawkish Fed script. The policy rate still needs to be in a zone that may be regarded as being adequately restrictive, he said.

Equities plummeted, and the US Dollar recovered and rose as the week ended, putting pressure on the AUD/USD.

In the United States, the unemployment rate was released on Thursday and held steady at 3.4% in September, which is a multi-generational low. This was less than the predicted 3.5% rate.

The geopolitics of the Ukraine crisis provided some volatility, with a missile falling in Poland among all the data and Fed talk. US Dollars were purchased to devalue AUD/USD due to concerns about the violence escalating.

It is impossible to overestimate the human cost of this conflict.

Economically speaking, the battle has shown that Russia is an immediate rival to many Australian goods.

Australia’s trade balance is expected to improve in 2022 due to sanctions on Russia. September’s surplus of AUD 12,444 billion set a new high. Early December will provide us with the statistics for October.

Before that, the RBA will convene on Tuesday, December 6, to deliberate how to adjust the cash rate target. The market has factored in the potential for a 25 basis point (bp) increase.

The Federal Reserve is anticipated to raise interest rates by 50 basis points at its next meeting on December 14. The price fluctuation in AU-US yield spreads was mirrored in this week’s movements of the AUD/USD.

The AUD/USD looked to roll over simultaneously as the return from Treasury bonds climbed higher than from Australian Commonwealth Government Bonds (ACGB).

This connection may explain the Australian’s course over the next week.

AUD/USD AGAINST AU-US BOND SPREADS OF 2 AND 10 YEARS