AUD monthly wrap: November 2023

Matt Simpson financial analyst
By :  ,  Market Analyst

AUD monthly wrap: October performance and highlights

  • Relatively hawkish RBA statement
  • Hot CPI, PPI and retail sales figures increase odds of another RBA hike (or two)
  • Mixed message from Governor Bullock
  • AUD was mostly lower in October, but saw gains against JPY, NZD and CAD




Michelle Bullock’s first meeting as RBA Governor initially looked to be ‘more of the same’, with rates held at 4.1% and no significant changes to the statement. Yet the October minutes were more hawkish than the statement let on, and Bullock’s subsequent comments on the importance of taming inflation and ‘no hesitancy to hike again’ putting us on high alert for a hot CPI print. So when the quarterly and monthly inflation numbers came in broadly above expectations (as did producer prices), the odds of a hike next week increased.


Hawkish comments from the RBA’s October minutes:

  • Inflation remained well above target and was expected to do so for some time
  • Retail petrol prices would continue to underpin inflation over coming months and could influence households’ inflation expectations
  • Upside risks [to inflation] were a significant concern
  • The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed
  • Some further tightening of policy may be required should inflation prove more persistent than expected




What to look out for in November

  • FOMC meeting (1st Nov)
  • RBA meeting (7th Nov)
  • Business and consumer confidence (14th Nov)
  • US inflation (14th Nov)
  • China industrial production, retail sales, investment (15th Nov)
  • Australian employment (16th Nov)
  • Australian flash PMIs: manufacturing, services, composite (23rd Nov)
  • Australian retail sales (28th Nov)
  • Australian monthly inflation report (29th Nov)
  • China PMIs, NBS: manufacturing, services, composite (30th Nov)



FOMC meeting: Clearly the two key events this month are the FOMC and RBA minutes, both of which occur over the next week. With Fed Fund futures implying a 99% chance of the Fed holding, it is pretty much a done deal. Yet economic data continues to surpass expectations to keep the ‘higher for longer’ narrative alive, whilst the Middle East conflict and higher US yields provides reason for the Fed to not hike further.


RBA meeting: I don’t think it’s unrealistic to be prepared for another hike or two with rates at the relatively low level of 4.1%. The bigger question is if we’ll see a hike next week. I place the odds at 60/40 in favour of another hike, but the mixed message from Bullock has muddied the waters. At the very least I’d expect a hawkish hold but, with inflation, producer prices, house prices and retail sales holding up, a hike may not be such a crazy idea.


AU data: If we somehow escape with rates held at 4.1%, then eyes will quickly shift to employment, retail sales and the monthly inflation reports to see if we can escape a December hike. I doubt the RBA have the appetite to hike in November and December unless employment truly falters and CPI continues to accelerate. But they’ll remain key data points none the less.


China data:  The sub-par numbers coming out of China have been a key reason that the Australian dollar has struggled to rally, despite its ability to hold above 63c. If we’re treated to stronger figures from China and a hawkish hike from the RBA, we might finally see some Aussie bears capitulate and switch to the long side from arguably oversold levels. That may be asking for a bit much though, but likely required for a sustainable rally.



AUD/USD futures: Market positioning from the COT report

Large speculators pushed net-short exposure to AUD futures to a record high five weeks ago, yet at a time gross longs and gross shorts were falling to show a general de-risking to the Aussie. Bearish conviction would require rising volumes, not falling volumes – and the fact that AUD/USD continues to hold above 63c despite a slew of negative headlines, risk-off and geopolitics suggests there’s some some support for AUD at these lows. However, what we are lacking is a compelling reasons to buy. But that could change in the coming month/s if the RBA have 1 or 2 more hikes up their sleeve whilst the Fed hold rates. A bonus would be if China data begins to pick up.



AUD/USD correlations

Sustainable trends driven by macro fundamentals are usually accompanied with strong correlations. Yet that seems to be lacking on the Australian dollar. The 20-day rolling correlation between AUD/USD and multiple key markets are all below the +/- 0.6 level to show weaker relationships. 3 months ago the Aussie shared strong positive correlations with gold, iron ore and inverted correlations with the US dollar, oil and yields. Yet these relationships have either diminished or reversed. It therefore makes sense that price action on AUD/USD has been choppy in recent weeks as it is failing to commit to a single theme while battling bears who are extremely net short.



AUD/USD daily chart:

The choppy nature of price action is apparent on the daily chart, alongside the loss of bearish momentum. Once again we see the Aussie is vying for a move to 64c, a level which needs to be broken before I get too excited about a sustainable move higher. On that same token, a clear break below 63c / November low could mark its next leg lower to bring 62c / 2022 low into focus.


For now, I’d prefer to seek bullish setups around 63c and be mindful that it may struggle to test 64c and roll over. Alternatively, bears could seek to fade into rallies towards 64c and target the lows around 63c – until a fundamental catalyst big enough arrives to break AUD out of its current rut.





-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge


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