This change in outlook is a pretty stark contrast to the US Dollar which is struggling after a pretty dismal February payroll report came in showing a 92,000 job loss.
RBA Being Hawkish and Oil Price Inflation Shock
The Reserve Bank of Australia is now definitely the most hawkish of all the major central banks, and this is largely down to inflation concerns. In Australia domestic headline inflation is running at 3.8% and shows no signs of slowing down – petrol prices are a major contributor to this, and things could get even worse.
The Reserve Bank’s Governor Michele Bullock has characterised the upcoming meeting as a live event – and Deputy Governor Hauser has reinforced this by saying that the economy is running at full steam with little to no spare capacity.
In fact lots of major institutions, including Westpac and the National Australia Bank, have now changed their forecasts to expect a rate hike at the next meeting which would lift the official cash rate to 4.1%. This policy divergence is a big deal for the AUD because it creates a pretty favourable interest rate differential against a US Federal Reserve that is struggling with slowing labour markets.
Chinese Trade Surplus & Geopolitical Risk Factors
External factors have actually helped out the AUD in recent times, despite the ongoing tensions in the Middle East. China has just reported a massive trade surplus of $213.62 billion in February which far exceeded market expectations and highlighted a 21.8% surge in exports. This has actually helped to offset the safe-haven demand for the US Dollar that would normally kick in during times of regional conflict.
Of course the escalating US-Israel-Iran tensions and the fact that oil prices have surged above $100 per barrel initially put the brakes on riskier assets but the AUD has actually held up pretty well thanks to its strong ties to the stabilising Chinese economy and rising domestic bond yields which recently hit a high of 5.0%.
