FORECAST OF THE AUSTRALIAN DOLLAR: NEUTRAL

• The US Dollar fell while the Australian Dollar rose.

• Risky assets increased worldwide as a result of a weaker US CPI report.

• The Fed’s strategy differs from the RBA’s, which might lead to divergent outcomes.

Due to a weaker US Dollar last week due to US CPI printing lower than expected, the Australian Dollar rose to its highest level over two months. Instead of the forecasted 7.9% and the prior 8.2%, the headline CPI was 7.7% year-over-year.

The Federal Reserve‘s aggressive rate increases this year may be helping the central bank in its battle against inflation.

As a result, the market is currently encouraged by the possibility that the US’s strict monetary policy would contain price pressures without crushing the economy.

As they did before the CPI statistic, the swaps and futures markets both have a 50 basis point increase priced in for the Federal Open Market Committee (FOMC) meeting next month.

The expectations of where the terminal rate may be today represent the primary difference. The apex of the current hiking cycle will occur at this pace. The final rate can be lower than predicted if inflation can keep trending downward.

In contrast to the most recent Australian CPI figures, which show an increase, the US inflation rate has slowed down.

If the Fed aggressively front-loads rate increases during this tightening cycle, it may pay off in the long term if the inflationary fires are doused sooner rather than later.

On the other hand, due to the RBA’s slower rate increases than the Federal Reserve, there is conjecture that the Australian cash rate may wind up being higher and staying there for longer.

This viewpoint is based on the fact that the terminal rate is higher than it would have been if the RBA had continued to be more hawkish. Following their meeting on the first Tuesday in December, the RBA will meet again in February 2023.

Aside from monetary policy, the lower US Dollar helped commodities markets, while expectations of China reopening were somewhat shattered. In the last six months, they have reported the most Covid-19 instances.

In the next week, statistics on retail sales will be released in Australia and the US, and the US will also get PPI information. A positive PPI reading might cast doubt on a Fed turnaround.