...I dare say that the hot US jobs report which has tempered expectations of Fed rate cuts would probably also have put paid to a Feb RBA rate cut.
...it is all about interest rate diffentials, which means that if the RBA appears more dovish than the Fed, the AUD will take a hard knock, expediting its decline to 60c.
...and a lower AUD will increase import inflation, as foreign inputs would be more expensive in AUD terms, making inflation harder to push down. ASX to drop as markets fret currency slump will put off rate cut Cecile LefortMarkets reporter
Jan 12, 2025 – 2.00pm
A plunge in the Australian dollar to its lowest level since the COVID-19 pandemic is complicating the task of the Reserve Bank of Australia as it prepares to meet next month to decide whether to cut interest rates.
Late on Friday, the local dollar hit US61.38¢, the lowest level since March 2020, increasing concerns that the fall would add to price pressures and bolstering the argument for keeping rates on hold for longer.
More importantly for the RBA, the Australian dollar as measured on a trade-weighted index – which reflects its value against a basket of foreign currencies based on other countries’ share of trade – dropped below 60.
This, economists argue, is a reason for worry. That’s because the RBA has long argued that the so-called TWI matters more than the movements in the US dollar, which typically affects the price of petrol and US holidays.
Hopes that the central bank may finally be able to start easing as soon as next month grew last week among investors and economists after data showed encouraging signs that core inflation was slowing. Traders ascribed a 72 per cent chance of a rate cut on February 18, up from 57 per cent late last year, while economists at two banks – ANZ and Macquarie – brought forward their easing forecast to February, from May.
“It is now at a very critical level,” Su-Lin Ong, chief economist for Australia and New Zealand at RBC Capital Markets, said of the TWI. The Australian dollar has rarely traded below 60 for long periods, she said, but the Aussie has traded below the 60 threshold eight times since December 19. It closed at 59.8 on Friday.
The Australian dollar has also depreciated against the euro, Japanese yen, and even its New Zealand counterpart, whose economy is deep in recession.
The broad pullback is largely due to different interest rate expectations between Australia and the US – financial markets imply three Australian cuts this year against just one in the US – and concerns about how China, Australia’s biggest trading partner, will react to the prospect of higher US trade tariffs as Donald Trump returns to the White House.
The Australian currency is regarded as a proxy for China’s growth and tends to fluctuate with its fortunes. It has been tracking a weaker Chinese yuan and there are expectations that Beijing could allow the yuan to depreciate in response to the trade war. That could be bad news, as a weaker Australian dollar is typically stimulatory for the economy and inflation.
The Australian sharemarket is poised for a weak start to the week, tracking a decline on Wall Street after a strong US jobs report dashed hopes for lower interest rates by the Federal Reserve. Futures indicate the S&P/ASX 200 Index is set to drop 0.9 per cent or 17 points. The local bourse has gained 1.7 per cent this year, within distance of a 8514.5 record set on December 3.
Investors dumped US shares on Friday, sending the Dow Jones 1.6 per cent lower, the S&P 500 down 1.5 per cent and the Nasdaq 1.6 per cent lower. That’s because data showed that the US economy added 256,000 jobs in December – well above analyst forecasts of 160,000.
Markets are now pricing in just one Fed rate cut and no sooner than June. Before the jobs report, traders were expecting at least one reduction in 2025, starting in May with a 50 per cent probability of another move by Christmas.
The yield on the US 10-year notes jumped to 4.79 per cent, a level last seen a little over one year ago. The Australian 10-year return is expected to rise in sympathy on Monday, approaching the 4.7 per cent set in November. It has gained 40 basis points since the December 11 low of 4.1 per cent.
This week, the focus will be on local jobs data to be published on Thursday. Economists expect the unemployment rate to tick up to 4 per cent in December, from 3.9 per cent in November. A total of 10,000 jobs is anticipated to be added.
Offshore, investors will watch US consumer price index on Wednesday (early Thursday AEDT) and China’s gross domestic product on Friday.
JPMorgan, Goldman Sachs, Citigroup and Wells Fargo are set to release quarterly results late Wednesday, early Thursday AEDT, as Wall Street’s fourth-quarter reporting season begins.
