Monthly Wrap: AUD – Australian dollar strengthens as market risk appetite improves

Key takeaways:

• Australian dollar rallies amid improving market mood
• AUD gains reinforced by positive data
• AUD Monthly lows: £0.55, US$0.62, €0.63, NZ$1.07, CA$0.86
• AUD Monthly highs: £0.57, US$0.67, €0.65, NZ$1.11, CA$0.90

The end of October brought a boost to the Australian dollar (AUD) as domestic inflation came in above forecast, prompting investors to bet on more aggressive interest rate hikes from the Reserve Bank of Australia.

This led to disappointment after the RBA delivered another 25bps rate hike from the RBA, in line with market expectations. This resulted in AUD exchange rates plateauing despite the RBA’s reiteration that they would bring down inflation.

However, the ‘Aussie’ was quick to find its feet again amid a return of market risk appetite. This upbeat market mood was linked to a pullback in the US dollar as investors scaled back their bets for future rate hikes from the Federal Reserve.

Strong Australian trade figures also provided a boon to the ‘Aussie’ in early November, with the nation’s trade surplus climbing to a three-month high.

Mid November saw the Australian dollar rally, as the minutes RBA’s latest meeting were released. The minutes revealed that policymakers remain open to raising interest rates by 50bps in the future.

Forecast-beating wage growth and unemployment data continued to support the ‘Aussie’, with the unemployment rate falling to 3.4% from 3.5%. Wage growth increased to 1% in Q3, pointing to improving business conditions and a recovery from the Covid pandemic.

However, the second half of November has taken some of the wind of the ‘Aussie’s sails amid concerns over a spike in Chinese Covid cases and the subsequent lockdown of key industrial centres.

Looking to December, investors may be hoping for a 50bps rate hike from the RBA. However, with the private sector beginning to slow, a large hike may still damage AUD by placing further pressure on the Australian economy. Furthermore, an expected jump in Q3 GDP may bring gains for the ‘Aussie’. The figure is predicted to rise from 3.6% to 6.5%, which would help to reassure AUD investors.