During Tuesday's Asian trading session, the Reserve Bank of Australia will summarize the results of its first meeting of the year. This is by no means a passing event, although the formal outcome of tomorrow's meeting is predictable: the regulator is likely to increase interest rate again by 25 points, raising it to 3.35%. This fact is already priced in, so all attention will be on the text of the accompanying statement and the rhetoric of RBA Governor Philip Lowe. Participants are interested in further prospects of monetary policy tightening, especially in view of contradictory macroeconomic reports.
The labor market has failed
At its last meeting, held in December 2022, the Reserve Bank voiced standard language and did not announce a pause in further rate hikes (as some experts suggested), thereby strengthening the position of the Aussie. But during January, key releases were published in the field of labor and inflation, which did not allow traders to put together the overall picture of the puzzle: Australian jobs report were weak, while inflation surprised with its green color, exceeding forecast estimates.
Thus, according to the latest data, unemployment in December remained at 3.5%, while most experts forecast a decline to 3.4%. But the share of the economically active population has really decreased to 66.6%, although there was an upward trend over the previous three months. However, the biggest disappointment was the increase in the number of employed: it fell into the negative area (-14.6,000), despite analysts' estimate of a 27,000 increase.
After the publication of this report, the Aussie fell sharply to the area of the 68th figure, but quickly recovered to the area of 0.7000–0.7150.
Isn't it all so sad?
In my opinion, the Reserve Bank of Australia will remain moderate but hawkish in February, thus providing support to AUD/USD buyers. Several fundamental factors speak in favor of this.
Firstly, the structure of the above report in the field of the labor market suggests that the level of part-time employment significantly decreased (-32.2 thousand), while the number of full-time employees increased by 17,600 in December. As you know, full-time positions offer a higher level of wages and a higher level of social security compared to temporary part-time jobs. Therefore, the RBA can interpret the published figures in this context without focusing on the overall (very, very weak) result.
Secondly, inflation is a serious argument in favor of maintaining the hawkish rate of the RBA. In the fourth quarter, the consumer price index (in annual terms) rose to a record high of 7.8% (against the forecast of 7.5%). The indicator continued the upward trend it had been demonstrating throughout the past year. On a quarterly basis, the index stood at 1.9% with a forecast decline to 1.6% and after the result of 1.8% in the third quarter. Australia's core inflation (weighted average CPI) also exceeded forecasts in quarterly terms, coming in at 1.7%.
RBA February meeting
The overall fundamental disposition (contradictory labor market data amid continued inflationary growth) suggests that the Reserve Bank is guaranteed to raise rates by 25 points at the February meeting and hint at a 25-point hike at the next meeting in March. Moreover, according to a number of currency strategists (UOB Group in particular), the Australian regulator will not stop at the March hike: in their view, the RBA will bring the rate to the 3.85% target before announcing the end of the current cycle (assuming inflation indicators start to slow down).
It is obvious that Lowe will not directly look beyond the March meeting—everything will depend on the tone of his rhetoric (and the rhetoric of the final communique).
Conclusions
The Reserve Bank of Australia is likely to support the Aussie, but it may be temporary. The U.S. currency continues to gain momentum, winning back the January nonfarm data, which turned out to be much stronger than estimated. Today, Treasury Secretary Janet Yellen added fuel to the fire by expressing confidence that the USA will be able to avoid a recession. She pointed out that the U.S. economy had created over 500,000 jobs last month, and the unemployment rate in the country had dropped to a 53-year low. With such results, she stressed it is not quite correct to talk about the real risks of recession. Yellen also expressed confidence that inflation would "significantly decline" for the foreseeable future and the U.S. economy would "remain strong."
In my opinion, the Australian dollar will follow the greenback in the medium term anyway, even if the RBA provides temporary support to the Aussie. This suggests that it is advisable to use the upward surges of AUD/USD as an excuse to open short positions. The nearest support level is 0.6840 (the lower line of the Bollinger Bands indicator on the daily chart). The main target of the downward movement is 0.6750 (the upper limit of the Kumo cloud on the same timeframe).
