The Australian dollar (AUD) rose to USD 0.66, hovering near its highest levels in over three months as Reserve Bank of Australia (RBA) Governor Michele Bullock warned that domestic demand has been contributing increasingly to inflation, requiring a “substantial” response from interest rates. Markets now see a 60% chance of another rate hike to 4.6% next year, up from 40% previously. The low point in the AUD was reached in mid-October, at around USD 0.628, when the USD was actively sought as a safe haven amidst the turmoil in the Middle East which began on 7 October.
Earlier in November, the RBA raised the cash rate by 25 basis points to 4.35% as inflation proved more persistent than anticipated a few months ago. On the data front, Australia’s manufacturing and services activities contracted further in November due to deteriorating demand conditions. Externally, investors continued to assess the outlook for US Federal Reserve (Fed) monetary policy amid mixed economic data in the US.
Source: Trading Economics
There are sound arguments for expecting the AUD to rally further:
Compared with its longer-term average, (which is above USD 0.70), it remains undervalued. Furthermore, if one analyses the rhetoric coming out of the RBA with that of the Fed, short-term interest rate differentials look likely to shift in favour of Australia. Commodity strength also favours the AUD, and our national finances look to be in far better shape than those of our global peers.
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