Date: 17 Nov 2017

A continuing absence of an acceleration in wages increases in Australia, even though employment growth has been on the whole pretty solid, arguably gives the Reserve Bank of Australia (RBA) little reason to raise Australian interest rates from their current 1.5 per cent level in the near future. Indeed “”it will happen in the context of nominal inflation and wage increases in the economy, when they are stronger than they are now” RBA Deputy Governor Guy Debelle said at a conference in Sydney earlier this week, when asked about the necessary backdrop for future rate hikes in Australia. But if the RBA sees no near-term reasons to move and the US’ Federal Reserve continues with rate hikes at the pace the market currently expects, it’s quite possible US benchmark rates could go above those of Australia.  On Thursday, Australian bank NAB noted that “currently, one-year swap rate differentials are within 10bps of crossing over. It would not be surprising to see cross-over occur before Christmas, out of the December 12/13 FOMC meeting.” Of course while, for the moment, the AUDUSD has indeed drifted lower, it has not been that pronounced a move. That said, and though traders will have their own opinions about how such a cross-over would impact investor appetite for the Australian dollar, such a development could yet prove something of a headwind for the AUD.

Written by Neal Kimberley, External Currency Analyst.