The Australian dollar fell to a low around 0.7858/60 overnight as the US dollar pushed higher across the forex universe in the wake of Janet Yellen’s rather hawkish take on the outlook for monetary policy.
This morning chair Yellen essentially said that while inflation has undershot the Fed’s target, and that is something of a mystery, she highlighted she still thinks that it will head back to the Fed’s 2% target.
Further, she worried that the tight labour market would see inflation eventually rise which meant the Fed couldn’t wait to see the whites of inflation’s eyes because to do that was to risk a hard and sharp increase in interest rates which could, in turn, lead to a recession.
It’s the clearest sign that the process of normalisation continues at the Fed. With loose financial conditions, such moves are not likely to impact growth if Yellen and her colleagues are given the chance to gradually lift rates.
But it will impact the US dollar and as such it will pressure the Aussie dollar.
So the drift continues for the Australian dollar which could face substantial downside if the USD recovery that is presently underway really gains traction. I expect that to be the case and even if the rally ultimately proves ephemeral a rally of 2-3% from here for the DXY seems likely. That would suggest an AUDUSD which tests 0.7740/50, perhaps even 0.7650.
Also weighing on the Aussie is the debate about interest rates here in Australia. While we have the NAB, ANZ – and me – expecting rate hikes in 2018 but Westpac’s Bill Evans and Capital Economics Paul Dales – both economists I respect greatly – taking the other side of that argument.
While this debate continues comments from the RBA suggest caution as they worry about household debt. That then feeds through to expectations about Australian interest rates and into the AUDUSD and Aussie dollar cross rates.
Yesterday RBA assistant governor (financial system) Michelle Bullock said at a panel discussion, “when interest rates do start to rise in Australia, they are likely to impact consumption in a different way than they did when we were in a low debt society, so this is something the Reserve Bank will need to take into account”. That is RBA rate hikes will bite harder on spending because Australian households are carrying so much debt.
It’s up to the data in the end. But for the moment the USD move dominates.
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