The AUD/USD pair nearly reached a 4-month high on Tuesday, marking at 0.6650. The pair is growing this week more in defiance than "thanks to": retail sales data in Australia, which was disappointing, the head of the Reserve Bank of Australia was surprisingly cautious, and China continues to present unpleasant surprises – amid a sharp rise in respiratory illnesses, there are reports that the profit of major industrial enterprises in China decreased by 7.8% from January to October. Such a fundamental background does not contribute to the growth of AUD/USD, but the aussie continues to show character, updating new local highs.
Why is the Australian dollar resilient? In my opinion, it all comes down to the rise in hawkish expectations. Yes, despite the decrease in retail sales volume, despite the mixed Nonfarm Payrolls data, and even in spite of cautious comments from RBA Governor Michelle Bullock, the market is confident that the central bank will opt for another round of interest rate hikes in December or February – by 15 or 25 basis points.
It is necessary to recall the main points from the recent speech of another RBA representative – Marion Kohler (Assistant Governor). According to her, the process of reducing inflation in Australia has been slower than previously expected, and, consequently, returning to the target level will take longer. Kohler also noted that recently the risks of inflation acceleration have increased (particularly due to wage growth). She also warned that high inflation could lead to an increase in inflation expectations, and such an outcome is "highly undesirable."
This is an important remark that needs to be considered in light of the minutes of the latest RBA meeting. Following the November meeting, the RBA acknowledged that inflation expectations could increase significantly – if the interest rate is not raised. The Bank emphasized that it is extremely important to prevent even a slight increase in inflation expectations.
According to the latest data, consumer inflation expectations increased to 4.9% in November (from the previous value of 4.8%). This indicator has been rising for the second consecutive month, and at a more active pace compared to the expectations of most experts.
If we connect all the aforementioned information together, we can conclude that the topic of rate hike may reappear on the agenda, and in the very near future.
In regards to Bullock being cautious, it is worth noting that things are not so straightforward here either. In my opinion, the market has interpreted her words one-sidedly. Let's start with the fact that she was discussing the prospects of tightening monetary policy and, within this discussion, mentioned that the central bank should be "a little cautious" about using rates to reduce inflation without raising the unemployment rate. In this case, "cautious" does not mean a refusal to tighten monetary policy, but rather a reduction in scale. According to some experts, including Commerzbank, the central bank will resort to a rate hike in the foreseeable future, but not by 25, but by 15 basis points. This may also manifest in terms of determining the date of the hike. Again, according to currency strategists at Commerzbank, the central bank is unlikely to tighten policy at the December meeting, postponing consideration of this issue until February. By that time, the central bank will have data on inflation for the fourth quarter of 2023.
Thus, the topic of the RBA rate hike, in my opinion, remains relevant: many previous signals (including Bullock's statements) indicate the central bank's readiness for an additional step in this direction.
And while the decisive role in this matter will be played by the Q4 inflation report, the dynamics of the monthly Consumer Price Index cannot be ignored either. The October CPI data will be released on Wednesday. According to preliminary forecasts, the CPI is expected to decrease to 5.2% after two months of consecutive growth (in September, the indicator was at 5.6%). If, contrary to expectations, this indicator shows an upward trend again, the market's hawkish expectations regarding the RBA's future course of actions will significantly increase. In this case, the aussie will receive support, thereby strengthening the uptrend.
From a technical perspective, you should consider long positions. The AUD/USD pair is between the middle and upper lines of the Bollinger Bands indicator on the daily chart, as well as above all lines of the Ichimoku indicator, which demonstrates a bullish "Parade of Lines" signal. The nearest target for the upward movement is the level of 0.6670 (upper line of the Bollinger Bands indicator on the daily chart). The main target is 0.6750 (upper band of the Kumo cloud on the weekly timeframe).
