Australian Dollar May Benefit As Inflation Concerns Rise

Fundamental Outlook for Australian Dollar: Bearish

- Westpac Leading Index for January fell 0.2% signaling that the economy may have entered a recession.
- Reserve Bank Of Australian policy meeting minutes showed that further easing may ahead.


The Australian dollar ended higher against most major currencies for a second week in a row as improving risk appetite has pushed commodity prices higher. The local dollar started the week flat against the greenback, but the Fed’s announcement to purchase government bonds sent the AUD/USD higher by over 300 pips. Fundamentally the picture remains cloudy for the high yielder, as the Westpac leading index fell another 0.2 percent—signaling that the economy may have contracted in the first quarter which would confirm that it has entered a recession. Additionally, the RBA’s minutes showed that despite the central bank leaving interest rates on hold, they still see downside risks to the economy and potential for further easing. Policy makers chose to pause in order to be able to gauge the impact of their prior easing which saw them lower their target rate by 4.0 percent to 3.25 percent—a 45 year low.

The printing of money by major central banks has raised concerns of re-inflation which has pushed commodities higher as traders look to hedge their exposure. The CRB index jumped from 209.98 to over 226.0 which was the largest weekly gain in two months. The action by the governments has also feed risk appetite which has made the high yielding currency attractive to investors seeking larger returns. The Conference Board Leading Index is the only major release on the schedule and if it declines for a fifth straight month it would add to concerns over the economy and could weigh on the Australian dollar. If bullish momentum continues we could see the ADU/USD look to test the January 7th high of 0.7272 with the psychological level of 0.7000 as possible resistance. - JR