Australian dollar outlook: steady ahead of RBA decision

The Australian dollar steadied last week, finishing close to where it began on Monday morning after a bumpy ride as it traded in the 0.6695 – 0.6785 range.

There were some key data releases both domestically and abroad that provided for some volatility but was ultimately directionless for AUD/USD and US Treasury yields have moved notably higher but the US dollar is yet to respond meaningfully.

The bond spread between Australian Commonwealth Government Bonds (ACGB) and US Treasuries is working against the Aussie at the moment.

The fourth quarter current account surplus came in at AUD 14.1 billion against AUD 5.5 forecast and the previous print revised up to AUD 0.8 billion from AUD -2.3 billion.

Month-on-month retail sales for January were up 1.9% rather than 1.5% anticipated and -4.0% prior.

Australian 4Q quarter-on-quarter GDP came in at 0.5% rather than the 0.8% forecast and against the previous 0.7% that was revised up from 0.6%.

Annual GDP to the end of December was 2.7% as anticipated and reveals more upward revisions to prior quarters. The prior read was 5.9%.

The Australian Bureau of Statistics (ABS) now publishes a monthly CPI figure which came out during the week at 7.4% year-on-year to the end of January. This monthly CPI covers 62-73% of the weighted quarterly basket and more details can be read here.

Unfortunately, this monthly figure has not been a very good indicator of where the quarterly number will be, but it is still relatively new, and it might be more useful further down the track.

The RBA is holding their monetary policy meeting this Tuesday as they grapple with 7.8% year-on-year according to the latest quarterly figures. The RBA has a mandated inflation target of 2-3% over the cycle.

On balance, the fundamental data above could allow the bank to hike. The futures market has priced in around a 75% chance of a 25 basis point lift that would take the cash rate to 3.60%. If they do raise rates, it will be the tenth time since lift-off in May last year.

Federal Reserve Chair Jerome Powell will be testifying in front of the Senate Banking Committee when he presents his semi-annual Monetary Policy Report on Tuesday.

The Fed funds target rate is currently 4.75% and they are forecast to raise rates at their meeting later this month His commentary will be closely scrutinised and might move the US dollar, which may see AUD/USD volatility spike.

AUD/USD against AU – US ten-year bond spread

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