Central Banks Maintain the Keys to Foreign money Course

The Australian Dollar made a brand new low for the 12 months within the fourth quarter, stopping in need of the November 2020 low of 0.6991. It seems that the impression of commodity costs and long-term rates of interest on the forex took a again seat to short-term rates of interest and the power of the US Dollar.

Will commodities get AUD merchants consideration?

The worth of iron ore was solely barely weaker by means of the fourth quarter after collapsing within the third. Nevertheless, vitality commodities surged into the top of the 12 months.

AUD Dollar Forecast

The state of affairs on the commodity entrance is greatest illustrated by the RBA commodity index. The index is weighted in keeping with Australian exports, and it stays at elevated ranges. The charts above from the RBA spotlight the robust contribution from commodities to the commerce steadiness.

It needs to be famous that the phrases of commerce are at cyclical highs. This can be a vital enhance to the Australian financial system.

Regardless of the notion of a slowdown in China, commodity exports proceed to enhance the underside line.

Charge Spreads May Play a Function for AUD?

Taking a look at rate of interest differentials, each the 1 and 10-year bond yield spreads of Australia over US peaked at about the identical time that the AUD/USD hit the November excessive. As each spreads contracted, AUD/USD went decrease. Nevertheless, the 10-year unfold seems to have had much less of an impression than the 1 -year – as proven within the chart under.

This was additionally occurring at a time when the US Greenback was appreciating throughout the board.

Narrowing rate of interest differentials and US Greenback power got here at a time when the Federal Reserve turned extra hawkish.

AUD/USD Towards USD Index (DXY), AU-US 1 12 months Unfold and AU-US 10 12 months Unfold

AUD/USD Against DXY 1 Year Spread

Chart ready by Dan McCarthy, created with TradingView

Trying into 2022, AUD/USD seems to be on the whim of Australia/US rate of interest differentials and the US Greenback, whereas commodities appear to be out of the image for now. It’s the current change in tack by the Federal Reserve that’s driving charges and the demand for US {Dollars}.

The RBA has remained comparatively dovish at a time when central banks across the globe need to tighten financial coverage aggressively. A strong Australian financial system could possibly be the issue to tilt the RBA into motion and unwind pandemic stimulus.

Headline CPI is on the cusp of the higher sure of their goal vary of two – 3%, whereas their most well-liked measure of trimmed imply inflation, is on the decrease sure.

Their subsequent assembly is early February, by that stage, officers may have fourth quarter CPI to take note of. With many Australian states re-opening within the fourth quarter, it’s doable to see an up-tick in costs. This might pressure the RBA’s hand and a few hawkishness may be seen. The Australian Greenback could proceed to languish till the RBA modifications its tune.

On this situation, AUD/USD could soften into early 2022 whereas the Fed stays on observe to tighten coverage at a quicker tempo than the RBA. A powerful CPI print may see the RBA bounce into motion in February and this may see AUD/USD recognize.

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