There is quite a bit happening in the world of finance and currency trading right now. The Austrian Dollar has fallen for the second day in a row. It has also seen a CPI beat that has revealed a worrying trend for the RBA. However, there are some other things to consider, as well.
Commodity prices
The AUD/USD pair rose on Tuesday in choppy trading. The move was triggered by a rally in commodity currencies on a wave of liquidity. It’s not good news for the Australian economy. But it’s also not bad for the Australian dollar, which has been appreciating a lot lately, thanks to higher commodities prices.
A look at the Australian benchmark iron ore price shows that it has been volatile over the first half of financial year 2022. Spot prices ranged from $87/dmt to $223/t. Prices have been stronger in the second half of the year. Despite the volatility, the spot iron ore price is +$10/t higher than the same time period in financial year 2021.
The most impressive price formation was seen in the metallurgical coal sector. Fly-up pricing was caused by multi-regional supply disruptions. Metallurgical coal fines differentials to the MV64 index widened by about a quarter on a half on a half for the 58% index.
Terms of trade
The terms of trade for the Austrian dollar have ebbed and flowed over the past several decades. While the relative exchange rate of the US dollar has dropped precipitously, the real currency has been stymied by a number of high profile events. In particular, the early 1990s world recession has caused the country to miss out on much deserved economic jubilee. Despite the economic upheaval, the country has managed to maintain a healthy balance of trade. To keep the economy afloat, the government has implemented a raft of measures aimed at improving the business climate and bolstering the lagging competitiveness of the local economy. This includes a plethora of tax and regulatory reforms, as well as a new round of subsidies and tax incentives. It is hoped that these will provide a welcome shot in the arm.
A recent study by the Reserve Bank of Australia finds that while the country’s terms of trade have not changed much over the past few years, the most expensive goods have been stymied by soaring imports and a lack of domestic capital investment. The central bank’s latest quarterly report on the economy suggests a few more bumps in the road in the months to come.
Inflation forecast
The Reserve Bank of Australia has released its latest inflation forecast, and it’s not good. According to its most recent forecast, Australia’s inflation rate is expected to peak at around 8% this year, with the rate then set to decline.
Inflation has become the major pressure on the RBA’s policy, and the bank has stepped up its rate hikes in order to keep its cash rate in the target range. But in the future, the RBA’s forecasts say the path to lower inflation will be limited.
RBA Governer Philip Lowe says inflation will fall to a level that’s “reasonable” over the next few years. However, he said the inflation rate is still higher than the 2% to 3% target range, and will need to be brought back within the range.
A number of factors contribute to the high inflation rate in Australia. These include strong domestic demand and high prices for groceries and new dwelling construction.
Australia’s policy tightening debate
Australia’s economic recovery is on a solid path, but it’s also vulnerable to downside risks. A combination of a weaker global growth outlook and persistently high inflation, as well as an ongoing housing price decline, threaten the country’s ability to sustain its resurgence.
As such, the Reserve Bank of Australia (RBA) is working to rein in inflation. Its inflation target is to keep annual consumer prices inflation between 2 and 3 percent. The RBA has raised interest rates four times in the past six months, ranging from a quarter point in June to 25 basis points in October.
While Australia’s economy is on a solid trajectory, the global growth slowdown, persistently high wage pressures, and the housing slump are weighing on consumer spending. These factors mean the RBA is likely to keep hiking rates in the near future.
On the upside, the new Labor government has kept spending in check, but a booming economy could still face the threat of a recession. Structural reforms, like improving labor productivity and lowering carbon emissions, are needed to reverse this trend.
