Week Ahead: Australia and Canada Kick Off Central Bank Bonanza
XM Group | Dec 02, 2022 07:21AM ET
A litany of central bank meetings lies ahead in the first half of December. The ball will get rolling with the Reserve Bank of Australia and the Bank of Canada next week, both of which are expected to raise interest rates, albeit at a slower pace. Meanwhile in America, business surveys and producer prices will shape expectations around Fed policy, helping investors decide whether the dollar’s best days are behind it.
RBA shifts into lower gear
The Australian economy continues to fire on most cylinders, setting the stage for another rate increase when the Reserve Bank concludes its meeting early on Tuesday. Markets currently assign a 75% probability for a quarter-point rate hike and a 25% chance for no change at all.
Economic developments since the RBA last met have been favorable. The labor market remains extremely tight, with the unemployment rate having fallen back to a half-century low. Meanwhile, wage growth fired up last quarter, which is usually a sign that inflationary forces are becoming entrenched.
Economic data validate this narrative. Even though official US data remains solid with consumption and the labor market still in good shape, forward-looking indicators warn of trouble ahead. Hence, the Fed has to keep going for now, especially since inflation is still running hot, but is likely to encounter growth problems by the middle of next year.
As for the dollar, all this suggests that it’s too early to call for a bearish trend reversal just yet as the outlook for other major economies is even worse, but the rally is likely in its final chapters. A softer Fed profile is usually not enough to turn the tide in the dollar - it also requires an improving economic outlook in the rest of the world to draw capital outside the US, which is currently not the case.
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