Australian Dollar, AUD/USD, RBA, YCC, Iron Ore, China – Talking Points
- RBA Picnic to fight December quarter inflation at 7%
- AUD/USD recovers from Friday’s losses to start the week
- Hard-line RBA boosts Australian dollar but iron ore crash is on its way
The Australian dollar stabilized after the RBA spent the morning in broadcast mode.
It was a busy day for the RBA’s media department, with their review of the Yield Curve Control (YCC) program published, Governor Lowe addressing and the release of the MPC meeting minutes.
Dr Lowe was speaking at an American Chamber of Commerce event in Sydney. He has essentially re-enforced the main points of the YCC review and reiterated his comments from last week.
Notably, they expect inflation to reach 7% in the December quarter and the liquidity ratio may reach 2.5% later this year.
The YCC program was badly abandoned by the Reserve Bank of Australia in November 2021 when fundamental conditions and subsequent market forces overshadowed its purpose.
The RBA is aware that the YCC has run into problems and that the bank has suffered reputational damage during its exit from the programme. Most notably, the volatility in the markets when targeting a yield in a specific security is no longer justified from a fundamental perspective.
The Bank noted that a major problem arose due to the time guidance the Bank provided to exit to the YCC in 2024. Economic growth improved at a faster pace and to a higher level than expected when the policy was implemented.
When it comes to inflation, Dr. Lowe highlighted 3 factors that the bank believes will bring inflation back to the 2-3% target next year.
- The epidemic supply issues will be resolved gradually.
- Technical – inflation is the rate of change in prices not the level. Public relationsIce need to keep increasinging in order to keep inflation high. (something the Fed referred to as “primary effect”)
- tighten monetary policy worldwide.
These are all possible possibilities, but they can also be problematic. At the very least, the only thing a central bank can control is the demand side of inflation. The Reserve Bank of Australia made it clear that policy is being tightened to achieve this.
The Australian dollar is facing other headwinds this week. Iron ore prices have fallen along with many other industrial minerals. Iron ore futures on the Singapore Stock Exchange (SGX) and the Dalian Commodity Exchange (DCE) are down about 20% from their April highs.
This is due to pessimism about China’s policy on the Covid-19 zero state that is undermining economic activity in the world’s second largest economy.
China’s real estate market remains mired in uncertainty due to the sudden shutdown despite Beijing’s efforts to provide political support.
Chart created in TradingView
— By Daniel McCarthy, Strategist for DailyFX.com
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