Forward march
The Australian dollar has also shrugged off news that Chinese property giant Evergrande will be liquidated, a move that may ultimately lead to weaker demand for Australian exports.
The currency is still, however, on track for a 2.9 per cent decline in January, thanks to a resurging greenback as traders dialled back their rate cut bets from the US Federal Reserve this year.
All eyes will on Wednesday’s key inflation report that will help determine whether the RBA is done with raising interested rates, before the Fed announces its latest policy decision on Wednesday (Thursday AEDT).
“The repricing in Fed rate cut expectations in recent weeks has overwhelmingly been the primary catalyst for the USD’s gains,” said Richard Franulovich, head of FX strategy at Westpac.
For Australian investors, the much-awaited consumer price index for the December quarter will likely bolster the case for the cash rate to stay at 4.35 per cent when the RBA meets next week, which in turn will weigh on the local dollar.
Economists polled by Reuters suggest headline inflation will have moderated to 0.8 per cent in the fourth quarter, from 1.2 per cent in the September quarter. Annually, it would bring the pace to 4.3 per cent, from 5.4 per cent a year ago.
Core inflation, the preferred measure of the RBA, is also expected to have slowed to 0.9 per cent from 1.2 per cent in the three months to September, taking the annual pace to 4.3 per cent, from 5.2 per cent.
That would be below the RBA’s own forecasts of inflation slowing to 4.5 per cent, giving the central bank little reason to deliver a one-more-to-be-sure rate rise at its first board meeting next month.
Still, at 4.3 per cent, inflation remains well above the central bank’s inflation target of 2 per cent to 3 per cent. Markets imply only a 4 per cent chance of a rate increase on February 6. That day, the RBA also releases its latest economic forecasts which will provide insights on the interest rate outlook.
Bond markets are fully priced for an RBA rate cut in September and ascribe a strong chance of a follow-up move in December.
March rate cut
Over in the US, the Federal Open Markets Committee will end its first two-day monetary policy meeting of 2024 on Wednesday (early Thursday AEDT) and is widely expected to leave the key Fed funds target rate unchanged at 5.25 per cent to 5.50 per cent.
Bond futures ascribe a 50 per cent chance of the first US rate cut in March, down from 89 per cent late December after data reinforced the resilience of the US economy. Even so, they still imply 137 basis points of easing this year – equivalent to at least five quarter-point reductions, starting in May.
“We think the Fed, erring on the side of caution, may prefer to wait until mid-year before starting its easing cycle,” said Brian Martin, head of global economics at ANZ.
Investors will also focus on comments from Fed chairman Jerome Powell after he signalled in December that the central bank was pivoting to a rate-cutting cycle.
The Bank of England also meets this week and is widely expected to keep its policy rate at 5.25 per cent. The market anticipates around 100 basis points of reductions in the UK this year, starting in June.
