AUD climbs against a basket of currencies as RBA treads a fine path

On the hawkish side, the board agrees that there is a risk that returning inflation to the RBA's target range of 2-3% will take longer than expected. Consumer price inflation ran at 5.4% in the third quarter. But this is balanced by the risk that aggregate demand slows more quickly than anticipated. Australia's economy barely grew in the third quarter. Exports have been on a downward trend since the middle of last year. Households have been cutting back spending. The jobless rate hit a 1-1/2 year high of 3.9% in November. Since May last year, the RBA ramped up interest rates by a whopping 425 basis points. Futures now imply just a 5% chance of a rate rise at the next RBA meeting in February, and two quarter-point cuts by the end of 2024.

(AI Video Transcript)

The Reserve Bank of Australia

The Reserve Bank of Australia (RBA) recently decided to keep its cash rate steady at 4.35%. In simple terms, the cash rate is the interest rate that banks pay when they borrow money from the RBA. The RBA is trying to find the right balance in considering the latest economic data. On one hand, there is the concern that it may take longer than expected to bring inflation back to the desired level of 2-3%. Inflation is basically when the prices of goods and services go up. On the other hand, there is also a worry about the Australian economy not growing enough and exports declining. This means that there might be a risk of a higher demand for goods and services than expected.

The Australian dollar

In terms of currency exchange, the AUD has been doing well against multiple currencies. For example, it's on track to reach its highest value compared to the USD since July. This is partly because the US dollar has been weak, but also because the Australian dollar has been gaining strength against the Japanese yen. This is important because Japan has decided to keep its interest rates unchanged for now.

Interestingly, despite the Australian dollar's strength, experts believe that there is only a 5% chance of an interest rate increase at the next RBA meeting in February. In fact, there are indicators that suggest there might even be two quarter-point cuts in interest rates by the end of 2026. This means that the market does not expect the RBA to make any immediate changes to interest rates.

'In conclusion, the RBA is dealing with the challenge of balancing inflation targets, economic growth, and the value of the Australian dollar. While there are concerns about inflation taking longer to reach the desired range and the slow growth of the Australian economy, the recent strength of the Australian dollar also plays a role in their decision making.