Strong inflation data allowed the Australian dollar to consolidate its lead in the G10 currency race. It has already gained 4.2% since the beginning of 2022 and created a decent handicap with the second-place New Zealand dollar, thanks to the fading hopes of a pause in the Reserve Bank's monetary policy tightening process, the reopening of the Chinese economy and the hopes to avoid a global recession. Rising risk appetite supports AUDUSD no less than the positive from China.
In the fourth quarter, Australian inflation accelerated to a 33-year high of 7.8%, exceeding Bloomberg's forecast of 7.6%. The figure may be less than the 8% expected by the RBA, but its momentum remains upward. The peak, unlike in other developed countries, hasn't been reached. So, the Reserve Bank has more work than its competitors, which allows AUDUSD to continue its rally.
Inflation dynamics in Australia and other countries
In December, consumer prices accelerated to 8.4%. Core inflation also beat estimates in the fourth quarter, accelerating to 6.9%, while the service sector recorded its biggest increase since 2008. Prices for domestic holidays jumped 13%, while abroad jumped 8%.
Such dynamics of indicators allowed the derivatives market to increase the chances of a cash rate increase by 25 bps, to 3.35%, in February to 90% and lay the foundation for another quarter-point hike in borrowing costs in March. The likelihood of a pause in the RBA's monetary tightening cycle has declined sharply, catalyzing AUDUSD's rally above 0.71.
In my opinion, the markets correctly assess the prospects for the Australian dollar. Its close relationship with China allows it to receive preferences in three areas at once. First, the Aussie is seen as a proxy currency for China. Anyone who does not want to trade in the yuan buys the Australian dollar. Secondly, the Aussie is a commodity currency, and the prospects for the commodity market in light of the potential growth in demand from the largest consumer look unambiguously bullish. Finally, the Australian dollar is a risky currency, and the rally in world stock indices plays into its hands.
At the same time, AUDUSD bulls benefit from the weakness of the U.S. dollar. The futures market continues to bet on the Fed's "dovish" reversal in 2023, and the deterioration of macroeconomic statistics across the U.S. contributes to this. Investors are asking themselves the question: at what point will the policy of dependence on data force the Fed to reduce the cost of borrowing? Some traders are already beginning to insure the risks that the U.S. central bank will not raise the federal funds rate in March, ending the cycle of tightening monetary policy in February.
Technically, the AB=CD pattern continues to materialize on the AUDUSD daily chart. Its target of 261.8% corresponds to the level of 0.731, as stated in the previous article. This is where the pair is heading, creating a buying opportunity.