RBA Rate Hike Talk Prompts Australian Dollar US Dollar (AUD USD) Exchange Rate Climb
The AUD USD exchange rate was dragged slightly higher on Wednesday by talk that the Reserve Bank of Australia (RBA) could move for an interest rate hike in mid-2018.
According to a report from HSBC Australia, robust economic growth and improvements within the mining sector could prompt the RBA to begin raising its official cash rate by the middle of this year – a lot sooner than expected.
The report read:
‘The main force at work has been that mining investment is stabilising, after falling significantly in recent years. At the same time, growth in the non-mining sectors has remained solid’.
Indeed, as the labour market tightens and the conditions within the mining industry improve, wages should, in theory, increase modestly – growth that could eventually lay the roadwork for the RBA to begin normalising its cash rate.
The report did, however, point to the risk that wages could stay sluggish for longer than anticipated, with the cooling housing market also liable to drag on growth (particularly if Chinese household demand pulls back).
Nonetheless, this news proved effective in bolstering the Australian Dollar (AUD), even with the US Dollar currently rallying against other majors like Pound Sterling (GBP) and the Euro (EUR).
US Dollar (USD) Exchange Rates Recover on Euro Weakness
The US Dollar (USD) broadly rallied on Wednesday, bolstered by the relative weakness of the Euro (EUR).
This followed an extended period of bearishness, with investors continually apprehensive that the ongoing soft state of consumer prices could weigh on the Fed’s plans for more rate hikes in 2018.
Beyond this, analysts also point to the coming change in leadership at the Federal Reserve, with current Chairman Janet Yellen due to step down in February to be succeeded by Jerome Powell.
Whilst Powell is not regarded as a candidate that will deviate from her protocol, a change in leadership often brings with it an element of uncertainty.
AUD USD Exchange Rate Forecast: Volatility Ahead on Release of FOMC Minutes
Markets are currently waiting for the release of December’s FOMC meeting minutes from the US Fed, with many hoping that they will reveal a clearer outline for monetary policy in 2018.
Current expectations are that we could see 4 rate hikes in 2018, with some even suggesting that the first could occur in March (markets predict a 75% chance of a 25 basis point hike in this period).
This will be highly dependent on the performance of core consumer price growth, however.
In other news, markets will be interested in the US ISM readings for manufacturing, prices paid, new orders and employment, as well as the imminent construction spending figures.
On the ‘Aussie’ front, tonight’s AiG performance of service index figures for December could also rock the boat, although the most significant driver today will likely remain the US FOMC meeting minutes.