RBA Caution Over Wage Growth Limits Australian Dollar US Dollar (AUD/USD) Exchange Rate Strength

RBA Commentary Weighs Down Australian Dollar US Dollar (AUD/USD) Exchange Rate

The relative dovishness of the Reserve Bank of Australia (RBA) has kept the Australian Dollar to US Dollar (AUD/USD) exchange rate under a significant degree of pressure this week.

Comments from RBA Governor Philip Lowe helped to drive demand for the Australian Dollar (AUD) down further on Thursday morning, citing continued concern over rising household debt.

Lowe highlighted the need for an increase in domestic wage growth, which has remained near historic lows, as the prospect of any imminent return to a monetary tightening bias has diminished.

With the RBA looking set to keep rates on hold until wage pressures begin to build, the appeal of the Australian Dollar has weakened.

Even a sharp uptick in Chinese import volumes was not enough to shore up the commodity-correlated Australian Dollar, especially give that the wider sense of market risk appetite remains limited.

Disappointing US Consumer Credit Fails to Dent US Dollar (USD) Exchange Rates

A sharp dip in December’s US consumer credit figure helped to limit the downside bias of the AUD/USD exchange rate, denting confidence in the underlying strength of the world’s largest economy.

Nevertheless, as the odds of further Federal Reserve policy tightening remain high the US Dollar (USD) was still able to remain firm against rivals such as the Australian Dollar and Euro (EUR).

While there has been some caution in comments from some Fed policymakers in recent days the chances of an imminent interest rate hike have not gone away, keeping a floor under USD exchange rates.

Even though there is still a significant degree of uncertainty over the ultimate impact of the Trump administration’s tax cuts, the US Dollar remains well-supported by the wider sense of market risk aversion.

Further Australian Dollar (AUD) Losses Forecast on RBA Statement on Monetary Policy

Although further volatility is forecast for the AUD/USD exchange rate as a result of the RBA’s latest quarterly Statement on Monetary Policy, it is unlikely to reverse the recent downtrend.

The central bank is unlikely to sound hawkish given the cautious nature of Lowe’s comments on Thursday.

As a result, the Australian Dollar may struggle to gain traction ahead of the weekend, even if December’s investment lending figures improve.

Looking ahead to next week, AUD exchange rates could return to a bullish trend if January’s labour market data shows improvement at the start of 2018.

However, continued tightening of the labour market is unlikely to be enough to significantly boost the Australian Dollar unless this leads to an acceleration in wage growth.

With the RBA appearing primarily focused on wages and household debt any other positive domestic data may struggle to have much of an impact on the direction of AUD exchange rates in the longer term.

Fed Rate Hike Speculation May Limit US Dollar (USD) Exchange Rate Upside

While fresh US data is somewhat lacking in the short term this is unlikely to offer the AUD/USD exchange rate any significant opportunity for gains.

As long as global stock markets remain in a jittery mood the vulnerability of the US Dollar looks to be rather limited, continuing to recover from its bearish run during much of December and January.

However, if Fed policymakers adopt a less hawkish outlook in upcoming comments this may prompt some renewed softness for USD exchange rates.

Any doubts over the likelihood of the Fed raising interest rates again imminently should benefit the AUD/USD exchange rate, even though a sense of policy divergence between the RBA and Fed remains.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons