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According to the minutes of the October meeting published last week, the leaders of the Reserve Bank of Australia remain calm about the growing global inflationary risks, reiterating that interest rates will not be raised until 2024. These minutes report that inflationary pressures in Australia have become more moderate than in other advanced economies due to relatively slow growth in wages.
In addition to maintaining the interest rate at 0.10% and continuing the program for purchasing government securities in the amount of A $ 4 billion per week, the RBA noted serious progress in the fight against the COVID-19 pandemic. The increase in vaccination rates has led to the fact that the possibility of lifting coronavirus restrictions will appear much earlier than expected. In addition, the country's government is discussing the possibility of opening an international border. Without a doubt, this is a serious positive factor for the Australian economy, a significant share of which, in addition to the mining and raw materials sector, is made up of tourism and the services sector.
At the same time, the sharp rise in prices for energy resources, such as oil, gas, coal, support the high demand for the Australian currency to buy Australia's most important raw materials for AUD, primarily coal, LNG, and the gradual recovery of the world economy and weakness US dollar create preconditions for further growth in prices for iron ore and gold, the largest exporter of which is also Australia. At the same time, China's share in Australian exports is 40% (or approximately US $ 100 billion) for 2020, and Japan's share is 12.3% (US $ 30 billion). I.e. these the largest economies in the world (Chinese and Japanese) are the most important trade and economic partners of Australia, and their growth is a natural driver for the growth of AUD quotes.
Since March 2020, the AUD/USD pair has been developing upward dynamics, and the ending month of October may become one of the best for buyers of this currency pair. Since the beginning of the month, it has grown by almost 4%, breaking through the key resistance levels 0.7300, 0.7340, 0.7435 (see Technical analysis and trading recommendations), and its positive dynamics is still maintained.
The upbeat statistics from Australia also contribute to the growth of the AUD quotes. Thus, the index of activity in the construction sector from AiG, published earlier this month, showed a sharp increase from 38.4 to 53.3 points in September, which was significantly better than economists' forecasts. The index of business activity in the service sector from the Commonwealth Bank for the same period strengthened from 44.9 to 45.5 points with a neutral forecast. Investors were also enthusiastic about the statistics on the dynamics of the trade balance. At the end of August, the balance surplus increased from 12.650 billion to 15.077 billion Australian dollars against the backdrop of a sharp decline in imports and maintaining the same dynamics in exports.
Also, market participants watching the dynamics of AUD / USD will carefully study tomorrow's publication at 00:30 (GMT) inflation indicators.
It is expected that the RBA core inflation index using the truncated average method (for the 3rd quarter) will come out with a value of +0.5% (+1.8% in annual terms). Previous index values: +0.5% (+1.6% YoY) in Q2, +0.3% (+1.1% YoY) in Q1 2021, +0.4% (+1.2% YoY) in Q4 2020. Despite the continuing dynamics, this is still a weak value of indicator. If it turns out to be worse than the forecast, then it is likely to negatively affect the AUD in the short term. The data indicate low inflationary pressures in the country. The growth of the indicator above the forecast should have a positive effect on the AUD in the short term.
The Consumer Price Inflation Index (CPI), which will also be released tomorrow at the same time, is the most significant indicator of inflation. A high reading is positive for the AUD, while a low reading is negative. Previous values of the indicator: +0.8% (+3.8% in annual terms) in the 2nd quarter, +0.6% (+1.1% in annual terms) in the 1st quarter of 2021, +0.9% (+0.9% YoY) in Q4 2020. According to the forecast, it is expected that the value of the indicator for the 3rd quarter of 2021 will be +0.8% (+3.1% in annual terms). Australia's central bank CPI inflation target is in the range of 2% - 3%. As follows from the minutes of the October meeting of the RBA, “the Central Bank will not raise rates until it reaches the target CPI inflation level of 2%-3% on a stable basis. This will not happen until 2024". Thus, the expected positive reading is likely to still not provide significant support for the AUD. If the indicator comes out with a value worse than expected, it will negatively affect the AUD, but so far only in the short term.
In general, the positive dynamics of AUD and the AUD/USD pair remains due to the above factors.
