The Australian dollar’s impressive rally in late 2023 encounters a fresh challenge this week, as inflation data is anticipated to provide insights into the Reserve Bank’s stance on earlier interest-rate cuts. Surging nearly 10% against the US dollar from late October through December, the Aussie benefited from a hawkish Reserve Bank and expectations of Federal Reserve rate cuts in the coming year. However, the rally may find hurdles if the November inflation data, expected this Wednesday, prompts the market to price in the first Reserve Bank of Australia (RBA) interest-rate cut earlier than initially projected in June.
Tim Baker, the Head of Macro Research at Deutsche Bank AG in Sydney, believes that market pricing for RBA interest rate cuts appears overly hawkish, and any signs of softer inflation could strengthen the conviction that the RBA is done cutting rates. Consumer inflation in Australia is estimated to have slowed to 4.5% in November, according to a Bloomberg survey.
Investors have expressed long-standing pessimism toward the Aussie, maintaining substantial short positions, even though they reduced these positions by half from mid-September. As of January 2, data from the Commodity Futures Trading Commission shows that they still held 42,658 contracts betting against the currency.
The Aussie dollar’s momentum indicator, the slow stochastics, has also turned bearish, signaling potential weakness after the currency’s rally faced resistance at 69 US cents.
Looking ahead, Baker anticipates the Aussie dollar to weaken to 65 US cents in the current quarter. Despite closing last week at 67.13 cents, easing from the five-month high reached in late December, concerns over the depth of Fed rate cuts may impact the currency further.
US inflation data, due this week as well, could add pressure to the Aussie dollar if it prompts investors to revise their expectations for Fed rate cuts. Additionally, Australia’s real household income situation, described as “quite poor” by Baker, and concerns over China’s economy are factors that may lead the RBA to consider rate cuts sooner than anticipated.
Nomura, in a note on January 3, indicated that the Aussie dollar’s upside potential may have reached its peak. The bank has exited long Aussie dollar trades against the US dollar and euro, citing factors such as the market’s aggressive Fed rate cut expectations, ongoing worries about China’s economy, and a below-consensus GDP forecast for Australia.
