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The Aussie Could Push Higher after RBA Meeting in May

In: Finance, Forex

The underlying fundamentals of the Australian economy remain strong and the Australian Dollar has been bumping up against resistance levels.

The backdrop of elevated commodity prices and a relatively healthy economic national balance sheet are underpinning the currency.

The Aussie is below the long-term average by historical standards, since the float in 1983, while the terms of trade remain at multi-generational highs. This is further boosting the domestic economy.

Australia has enjoyed unprecedented prosperity, since the RBA was mandated with an inflation targeting regime in 1993. Political parties of all persuasions would like to take credit for the rosy outcome, but the reality is that the stewardship of the central bank has played a crucial role in maintaining the wealth and economic health of the nation.

Soon, the RBA are likely to face a challenge in the May 3rd monetary policy meeting, but one that they have stared down before. Australian CPI will be published on April 27th and indications are that it has a strong possibility of shooting the lights out. A Federal election is to be held before May21st.

The market is pricing in a small probability of a hike in May but a strong chance of the first rate-rise at the June meeting. The RBA indicated that they will wait for the first quarter CPI number before acting on rates, after the February meeting.

The market appears to think that the RBA will wait until after the election. In 2007 they raised rates just before an election. If the CPI number is high, history suggests they will act.

Compounding the issue, is the embarrassing policy error that the US Federal Reserve has made. An argument around ‘cost push’ inflation being ‘transitory’ has been proven wrong.

The RBA have form and the play book to stare down inflation before it gets to ‘eye watering’ levels. The May meeting could well be ‘live’ for a hike, CPI dependent. A more hawkish RBA could see the Aussie trade above long-term averages.

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