Australian Dollar Bounces on Hawkish RBA but Iron Ore Weighs Where to for AUD/USD?

Australian Dollar, AUD/USD, RBA, YCC, Iron Ore, China- Talking Points

• The RBA are hiking to fight 7% December quarter inflation
• AUD/USD is recovering from Friday’s losses to start the week
• A hawkish RBA boosts AUD but collapsing iron ore is in tis way

The Australian Dollar is steady after the RBA spent the morning in broadcast mode.

It’s been a busy day for the RBA’s media department, with the publication of their review into their yield curve control (YCC) program, Governor Lowe giving a speech and the June monetary policy committee meeting minutes being released.

Dr. Lowe was speaking an American Chamber of Commerce event in Sydney. He essentially re-enforced the main points of the YCC review and re-iterated his comments from last week.

Most notably, they expect inflation to hit 7% in the December quarter and that the cash rate could be at 2.5% later this year.

The YCC program was infamously abandoned by the RBA in November 2021 when underlying conditions and consequent market forces simply overwhelmed its purpose.

The RBA recognise that YCC had problems and that the bank suffered reputational damage as it exited the program. Most notably the volatility in markets when the targeting of a yield in a specific bond was no longer warranted from a fundamental perspective.

The bank noted that a key problem arose due to the time guidance that had been given by the bank for an exit to YCC in 2024. Economic growth improved at a faster pace and to a higher level than had been anticipated when the policy was implemented.

When it comes to inflation, Dr Lowe highlighted 3 factors that the bank believes will bring inflation back toward their 2-3% target next year.

1. Pandemic supply issues will gradually be resolved.
2. Technical – inflation is the rate of change in prices and not the level. Prices need to keep increasing for inflation to remain high. (Something the Fed referred to as a ‘base effect’)
3. Tightening of monetary policy globally.

These are all feasible possibilities, but they could also turn out to be problematic. At the very least, the only thing a central bank can control is the demand side of inflation. The RBA have made it clear that policy is being tightened to achieve this.

The Australian Dollar is facing other headwinds this week. Iron ore prices have tumbled along with many other industrial metals. Iron ore futures on both the Singapore Exchange (SGX) and the Dalian Commodity Exchange (DCE) are down around 20% from their April peaks.

This is due to pessimism over China’s Zero-case Covid-19 policy that is undermining economic activity in the world’s second largest economy.

China’s property market remains mired in uncertainty due to sudden lockdowns despite efforts from Beijing to provide policy support.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter