Divergences in monetary policy often lead to long-term currency trends and that’s why the Australian dollar is so interesting heading into 2024. Most global central bankers are in the midst of a pivot and the Reserve Bank of Australia will probably follow but there is a good chance they don’t. Inflation is higher in Australia, housing prices haven’t fallen and the RBA 4.35% cash target rate trails the Fed and Bank of Canada. That’s why the market is betting that the RBA will be slower to cut with just 51 bps in easing priced in next year compared to 154 bps in the US. If the global economy accelerates and particularly if China delivers some economic stimulus, then there’s a good chance the RBA isn’t done hiking and that would super-charge the Australian dollar. The latest RBA forecasts see them only hitting the top end of their 2-3% inflation forecast at the end of 2025, which may not be good enough for RBA Governor Michelle Bullock. She said in November that inflation is “increasingly homegrown and demand-driven.” The next RBA meeting isn’t until February but it will be an interesting one and will include new forecasts. Technically, AUD/USD found some support well ahead of the 2022 low and rose above the 100-week moving average this week, while also challenging some longer-term trendlines. I think the USD side of the equation will be a risk but there’s room for some broader optimism about the Aussie.

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