It was a roller-coaster week for the Australian dollar, with much of the volatility driven by central bank rate moves. AUD/USD ended the week with a huge decline of 1.62% but has started the week in positive territory.
Last week’s releases indicate that the labour market remains robust and that inflation expectations are accelerating. Australia’s employment report for May, released on Thursday, indicated that the labor market remains strong. The economy created 60.6 thousand jobs, crushing the estimate of 25.0 thousand (4.0 thousand prior). The unemployment rate remained unchanged at 3.9%. On the inflation front, inflation expectations rose sharply to 6.7% in June, up from 5.0% in May.
The RBA is undoubtedly carefully monitoring employment and inflation data, and both of these releases lend support for the central bank to continue raising rates – the employment market is strong enough to handle tighter policy, while the spectre of unanchored inflation expectations is a red flag that the RBA cannot ignore. Policy makers are willing to take the risk that higher rates could tip the economy into recession if that is the price to pay for lower inflation, which is seen as a huge danger to the economy. The RBA will be in the spotlight on Tuesday, with the release of the minutes from the meeting earlier in June. At that meeting, the RBA shocked with a rate increase of 0.50%, bringing the cash rate to 0.85%. Most analysts had expected a 0.25% hike.
Even with the super-size hike, the RBA has some catching up to do, with a cash rate still below 1.0%. The markets will be hoped to glean some insights from the minutes as to the direction of RBA rate policy. Any signals that the RBA plans to hike again by 0.50% should result in gains for the Australian dollar.
- AUD/USD is testing resistance at 0.6952. Above, there is resistance at 0.7052
- There is support at 0.6834 and 0.6734
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