The Australian dollar is supported not only by China, but also by the Reserve Bank of Australia. The RBA wil not make a pause in the process of monetary restriction as there are no signs of inflation slowdown in Australia. Let’s talk about this topic and draw up a AUDUSD.
Weekly Australian dollar fundamental analysis
The Reserve Bank of Australia has always found arguments to justify its extremely slow rate hiking. Being concerned not to hurt its own economy, it raised borrowing costs by only 300 basis points from the start of the cycle through the end of 2022, while the central banks in the US, Canada and New Zealand added over 400 basis points. And now, when other regulators are hinting at a pause in monetary restrictions, the RBA can’t afford it. It has to hike the rates at the same speed, since inflation in Australia, unlike other countries, is not to slow down.
Monetary tightening
Source: Reuters.
At the first meeting in 2023, the Reserve Bank of Australia not only raised the cash rate by 25 basis points to 3.35%, the highest level since 2012, but also significantly changed the tone. Philip Lowe has abandoned last year’s formulation that the central bank is not on a predetermined rate track. Deutsche Bank sees this as a signal that the pause in monetary policy tightening is out of question so far. That said, the regulator believes that further increases in the cash rate will be required to ensure that inflation returns to its target and that this period of high prices is temporary.
The tone is distinctly hawkish and differs from previous ones when the RBA suggested the monetary policy should depend on the incming data. Thus, markets lowered the expected rate ceiling. Now investors, on the contrary, raised the interest rate ceiling to 3.9%. Deutsche Bank and Goldman Sachs even claim that the borrowing costs will rise to 4%. Actually, it is not surprising, given the acceleration of Australian core inflation to 6.9% in the fourth quarter, which is higher than the forecast of the central bank and similar indicators in the US and Britain.
Dynamics of Australia’s inflation
Source: Bloomberg.
Of great importance is the fact that inflation in Australia continues to grow, while in other advanced economies it is slowing down. This creates grounds for divergence in monetary policy, the AUDUSD uptrend could resume. Moreover, the RBA noticed that the central banks are currently moving in different ways.
The Australian dollar wins not only because of the RBA’s hawkish stance. A more weighty argument is the potential explosive growth of China’s economy after its opening. Moreover, relations between Canberra and Beijing seem to be improving. This is evidenced by the meeting of trade ministers, albeit virtual. The already positive trend in the Australian trade balance will become even better, which will support the Australian dollar in the future.
Weekly AUDUSD trading plan
After the first target for the AUDUSD longs was reached, the price has been corrected down. So, one might buy the Australian dollar cheaper. The target at 0.735 is still relevant. The pair could be moving up and down, but still, it is relevant to buy on the corrections.
Price chart of AUDUSD in real time mode
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