Off to the races – Whilst the RBA naps

Australia Day is behind us and the Australian summer holidays that seem to start somewhere between Melbourne Cup and the end of the first week of November has finally come to a close with another Djokovic win… But the markets have been moving while Australians have been BBQing, tanning and most likely skiing based on the latest Australian CPI figures– but more on that later. This week will be a huge week to step back into the office with the following data and decisions :

• Tuesday US CB consumer confidence
• Wednesday: Fed rate decision, ADP nonfarm employment, US ISM manufacturing PMI
• Thursday ECB meeting, BOE meeting, US jobless claims, US factory orders
• Friday: US nonfarm payrolls, US ISM services.

This will be closely followed by next Tuesdays RBA decision who will have just enough time to step back into the office and assess 2 months of data in dramatically changing markets and make a quick decision on our mortgage rates.

What’s changed since Melbourne Cup

Tuesday November 1^st saw gold hit USD1634, and then the low came in on the 3^rd of November at USD1618.  Since then we’ve seen Australian gold hit its 3^rd highest level in history, briefly reaching above $90,000 per kilo as gold has ridden a wave of inflation tapering (although still in some cases in double digits). 

Melbourne Cup Day also saw the RBA increase interest rates to 2.85%, its 7^th consecutive rise starting at 10bp in April and were followed in December by one more rise.  After this week, most other banks will have met three times since then with the world USD dynamics shifting.  The Bank of Japan has finally made gestures to start moving away from their ultra-loose monetary policy and the US appears to have finally started to tame the inflation monster with the Fed doves (looser monetary policy) seemingly more recently outnumbering the hawks (tighter monetary policy). On the back of this the DXY (USD index) has fallen from November tops of around 112 to now languishing under 102.  The ECB with headline inflation starting to ‘cool’ off in December to 9.2% from 10.1% in November has raised rates to 2.5%. They appear to have a more dovish stance to the US and likely to only raise by 0.25% this week.

In December China dropped its zero covid policy, which despite huge covid numbers has been a huge tailwind for the Aussie dollar as our main trading partner reignites. Now at the end of January with the covid numbers in China beginning to fall and commodity prices rising quickly, this will likely add to its support.

Meanwhile in a more meaningful ‘commodity currency’ comparison this week the Canadian dollar (or ‘looney’) rose strongly against the USD on the back of the Bank of Canada’s 8^th interest rate rise – though this one was the smallest at 0.25%. This takes their current interest rate setting to 4.5% - significantly higher than where the Aussie currently sits at 3.1%. Again following the more dovish stance of world banks, BoC Governor Macklem has openly confirmed plans of a pause in rate hikes, although this may only be a ‘conditional pause’ depending on inflation data.   

Off to the races

Meanwhile, while the rest of the world chased the inflation race, Australia and the RBA holidayed with the 2 month break, which now appears to be coming home to roost, with a particularly tough decision ahead next week for our central bank.  Current interest rate settings appear to be behind where the world currently sits and inflation is not tapering yet.

Headline CPI is now hitting levels above expectations with December CPI shooting up to 8.4% off a consensus of 7.6%.  Interestingly the summer holidays have aided and abetted these levels, with local beaches and holiday spots reporting reduced traffic as Australian jet setters who had been locked down through 20/21 making the most of overseas snow and tourist attractions vacating Australian and lifting travel and accommodation CPI to a whopping 13.3%.  Similarly as the rest of the world are now seeing reduced gas and electricity prices, with some down to pre Ukraine war, Australia’s poor energy policies continue to own goal with electricity inflation now up 8.6%.

What this means for precious metals

There should be continued strength in metals, and if a reversal of the last 2 month trend happens this is likely to be tempered by AUD weakness – though the less likely outcome.  If the USD continues to see weakness gold should continue to rise to the ever coveted $2000USD/oz.

One thing is likely now though the RBA has some tough decisions ahead of it which will see a lot of volatility in the Aussie dollar and potential big swings in gold and silver proving some good buying opportunities with the right timing on some AUD strength…..