Aussie Steady as Confidence Data Softens

The Australian dollar has edged lower on Tuesday. In the European session, AUD/USD is almost unchanged, trading at 0.6376.

Australian consumers have been hit hard by high inflation and steep interest rates, so it’s no surprise that consumers are deeply pessimistic about the economy. The Westpac Consumer Sentiment index declined by 2.6% in November, down from 82 to 79. The RBA’s recent rate hike certainly didn’t boost confidence, as consumers expect mortgage rates to continue rising over the next 12 months.

The NAB Business Confidence index fell to -2 in October, down from a revised zero in September. This was below the market consensus of 1 and was the lowest level since May. The silver lining was an improvement in business conditions, which rose in October from 12 to 13.

The Reserve Bank of Australia raised rates earlier this month after four consecutive pauses. Is the RBA done with its tightening cycle? The central bank meets next on December 5^th and has stressed that future rate decisions will be based on the data. Australia releases retail sales and inflation reports a week prior to the meeting, and these releases could determine whether the RBA hikes again or pauses.

The US releases the October inflation report later today. The release could provide clues as to how long the Fed plans to keep rates at elevated levels. Headline inflation is expected to rise 3.3% y/y, compared to 3.7% in September. The core rate is expected to remain unchanged at 4.1% y/y.

The markets have priced in a rate cut in mid-2024 and an unexpected inflation reading would likely lead to the repricing of a rate cut. The Fed has pushed back against talk of a rate cut, as inflation remains well above the 2% target. The markets haven’t been listening to the Fed, but they’ll be keeping a close eye on the inflation report.