There is a significant discrepancy between three key groups that are important to traders when it comes to the future of the AUDUSD.
The market appears to be pricing in a rate hike as early as next year. Analysts are insisting that it will be around mid-2023. And the RBA is saying it will happen in 2024. So, who’s right?
Well, we can’t really know what will happen in the future for sure, but we can look at some of the data that could give us some insight.
Retail sales might be an important indicator here. Sure, the RBA doesn’t make policy decisions based on retail sales. However, the main issue here is inflation, and when it’ll actually get bad enough that the RBA will need to intervene.
Follow the right leader
Retail sales data is arguably a more accurate measure of the economic situation than consumer sentiment surveys.
There is a difference between what people say they want to buy (or how much they want to save) and what they actually buy. After all, basic economics dictates that for prices to go up, you need increased demand.
Inflation would imply more consumers buying, so retail sales data can give us some insight into where inflation might be heading. If consumers are increasing their spending, then we know that more cash is circulating. If that happens when there are fewer products available to buy, for example, because there are supply chain issues, then the logical result is higher inflation.
It’s not as permanent as it seems
Australian core inflation came in well above expectations. This might be one of the reasons that the market is expecting higher rates sooner. In turn, this could help buoy the Australian dollar, already supported by higher commodity prices.
But analysts warn that the market might be getting a bit ahead of itself, and point to the RBA being more interested in the threat of wage inflation. After all, it’s up to the RBA to decide what rates will do, and if they want to keep them lower, they will stay low.
Of course, the RBA has to respond to the reality on the ground. And the underlying question is how long will the mismatch between supply and demand persist. Well, tomorrow, we can get the latest data on half of that equation.
What to look out for
Analysts expect Australia’s October Retail Sales to speed up, growing at 2.5% from 1.9% in August. Now, of course, this could be distorted by the covid situation in Australia at the time. In fact, by then many places were either starting to relax measures or providing timetables for doing so. That might have given consumers an extra boost.
However, a further move higher in the latest data would suggest a rising trend among consumers. And that is as soon as lockdowns are lifted, people are willing to go out and spend. Especially ahead of the holidays and as Australia moves into its summer season. That could translate into further upside pressure on inflation, and it might just move the needle a little more towards raising the rate sooner.
On the other hand, if we were to get a disappointment in the results, then that would support the outlook from analysts suggesting a rate will be later rather than sooner. The likely result there would be a weaker Aussie dollar.
Thursday, 25 Nov, 2021 / 11:46