Australian dollar eyes new heights ahead of crucial CPI data

The Australian dollar is pushing toward the five-month high seen last week at 0.7063 as the US dollar continues to come under pressure more broadly.

Several speakers from the Federal Reserve have recently stated that they now see hikes of 25 basis points (bp) as the appropriate pace of tightening in the upcoming Federal Open Market Committee (FOMC) meetings.

The futures and swaps interest rate markets are pencilling in such lifts at the February and March meetings but are then less enthusiastic about higher rates beyond there.

This perception around an end to further restrictive policy appears to have boosted equity markets and undermined the US dollar.

On the domestic front, tomorrow’s climacteric quarterly CPI data will be closely scrutinised for clues on the Reserve Bank of Australia’s rate decision on the 7th of February. The futures market is undecided with a 14 bp increase in the cash rate priced in. Neither 25 bp nor ‘no change’ is clear cut.

A Bloomberg survey of economists is anticipating the headline Q/Q CPI to go from 1.8% to 1.6%, while for the Y/Y read, they are forecasting it to go from 7.6% to 7.8%. The discrepancy is explained by a lower quarterly number dropping out from the fourth quarter of 2021.

While CPI is the focus for the RBA’s mandate of targeting 2 – 3% over the business cycle, the Producer Price Index (PPI) could also play a role.

PPI is going to be released this Friday and if it has accelerated over the fourth quarter, it could present a problem for CPI through this quarter. Businesses that are facing higher costs at the farm and factory gate have two choices.

They can absorb the increases in costs and take a hit to earnings, or they can try and pass on the price rises to consumers. With the unemployment rate languishing near multi-generational lows at 3.5%, profit-motivated enterprises might be keen to pass on their cost increases and maintain their margins.

While China is on holiday this week for Lunar New Year celebrations, the re-opening story there continues to underpin commodity markets.

Many of Australia’s exports have seen notable price gains since the world’s second-largest economy pivoted on its Covid-19 policy. If this continues, it may augment AUD/USD.

AUD/USD, copper, gold, iron ore and DXY (USD) index

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