FXA rode the economic tailwinds to a breakout for a 15-month high.

Data from the Australian Bureau of Statistics (ABS) suggests that the unemployment rate has likely peaked at October’s 4.4% with December’s reading at 4.1%.

Even more important for monetary policy, the consumer price index (CPI) in Australia is above the RBA’s target 2-3% range. After dropping as low as 1.9% last year, the CPI suddenly rebounded above the RBA’s target range. Improving economic numbers will thus threaten to keep inflation higher than target if the RBA does not pivot to a tighter policy stance.

And then there are commodities, the core of Australia’s economy. Companies like iron ore producer Rio Tinto have enjoyed strong rallies to start the year as investors wake up to the economic realities of massive infrastructure and energy investments to support the AI boom along with the increasing attractiveness of physical assets as major countries pile on more and more debt. I started accumulating RIO in October and included the stock on my shopping list for 2026. So far, the price action has yet to deliver any kind of buyable dip. The strength of these commodity plays suggests that commodity-rich economies are going to experience upward pressure on their currencies. The breakout in RIO aligns well with the breakout in the Australian dollar.

Conclusion

All signs point to continued strength in the Australian dollar. A pivot in monetary policy will all but confirm a bias higher for the currency. Moreover, Australia looks relatively more attractive as a country versus major economies like Japan and the U.S. where policy and political turmoil along with mounting debt levels could keep those respective currencies under constant pressure. My main question now is how and when will fresh buying opportunities come.

Be careful out there!

Full disclosure: long FXA

The post Australian Dollar Breaks Out As Economic Winds Blow Toward Rate Hikes appeared first on Inflation Watch.

Still, after the dust settles on this meeting, I fully expect the Fed to stay the course with a rate cut in December. Powell’s statements belie a Fed that is both gradually (some reluctantly?) accepting the case for looking through inflationary pressures and getting incrementally more worried about the labor market.

Division Translates Into Balking

Powell acknowledged strong disagreements among the Committee members. He teased a reveal in the upcoming minutes from the meeting, but the Fed vote says plenty. Recent appointee Stephen Miran unsurprisingly wanted a 50 basis point cut in a repeat of his dissent in the September meeting. Kansas City Fed governor Jeffrey R. Schmid delivered a dissent at the other end with a vote for leaving rates unchanged. Thus, it is easy to imagine the Fed currently holds a broad enough range of opinions on the direction for monetary policy to cause a pause in December.

In response to a reporter’s question about division in the Fed, Powell pointed out that Committee members have different forecasts and different levels of risk tolerances which come through in their speeches. Most importantly, Powell revealed that “there is a feeling in some we should wait.” Since there was just one vote for waiting during the latest meeting, I assume Powell referred to waiting instead of cutting in December – a not so subtle hint that the Fed as a group may already prefer not to cut in December.

The Case for A December Cut Still Looms

However, the hesitancy to cut in December directly contradicts Powell’s assessment of the economic situation. Powell noted that the current rate is above the neutral rate (“wherever it is”). Thus, policy is technically restrictive. Importantly, Powell ascribed the cooling in the labor market and the economy to restrictive policy. So if the Fed has truly adopted the mission to focus on addressing the downside risks in the economy, the Fed must stay biased to cut rates. At this point, the Fed will have a very difficult time explaining how it can “stand by” and watch a weakening economy and labor market.

While there remains upside risk to the Fed’s inflation mandate, Powell makes a weaker and weaker case every meeting that the Fed is truly concerned about that risk. He said plenty to indicate that the prospects for inflation are contained and even tame. Here were his main points on inflation:

• Most measures of long-run inflation expectations remain consistent with the Fed’s 2% inflation target.
• Services inflation is coming down
• Higher tariffs are pushing up inflation as one-time increase in the price level (the base case)
• The core PCE (personal consumption expenditures, the Fed’s preferred measure of inflation) without tariffs would be 2.3% or 2.4% without tariffs, not far from the 2% target.
• The tariff-driven increase in goods prices is happening within the longer-term context of goods deflation.

Thus, once the base case of a one-time effect laps the inflation readings, the Fed should be comfortably close to its target.

While Powell reiterated that the Fed is determined to make sure that the inflationary impact of tariffs is indeed a one-time increase in the price level, the overall picture painted by Powell makes inflation look well-contained. The implied upside risk from the uncertainties in tariff policy hardly seem noteworthy in Powell’s updated narrative.

On the other hand, Powell claims there is “no significant deterioration” in the economic data. While Powell pointed out that the downside risks to employment have risen, he did not express any concern for the highly publicized mass layoffs from big companies like Amazon.com (AMZN) and United Parcel Services (UPS). In response to a question about these layoffs, Powell only said that the Fed is watching these developments, and the layoffs do not yet show up in the initial claims data (of course not – these layoffs are recent announcements).

Overall, Powell sums up the labor issue as low hiring and low firing in the context of immigration policies shrinking the labor supply and a cyclical drop in the participation rate in the workforce. When asked how then will rate cuts help the job market, Powell responded that cuts will make sure the “labor market doesn’t get worse.” Upon hearing that explanation, I felt tingles of recessionary risks.

Inflation Warnings from Overseas?

While Americans are mostly focused on the inflation risks from tariffs, inflation is also proving stubbornly sticky in other major economies who are not at war with the global economy. For example, with inflation at 3.8% in the United Kingdom, the Bank of England is further away from its 2% inflation target than the Federal Reserve is from its target. In its last letter explaining the on-going inability to hit the target, the BoE reported:

“The recent increase in CPI inflation has owed largely to food prices and administered prices, including water bills and Vehicle Excise Duty. A reduction in total labour cost growth also appears to have been delayed by the increase in employer National Insurance Contributions (NICs) and pay growth in sectors with a large share of employees at or close to the National Living Wage (NLW).”

Yet, the BoE expects this year’s inflation increase to peak in September. The combination of a weakening labor market and restrictive policy is expected to help push inflation toward the 2% target next year. This is the UK version of hopeful monetary policy. The BoE just made its last rate cut in August, going from 4.25% to 4.0%. The policy rate was left unchanged in the last meeting.

Earlier this week, inflation in Australia hit its highest point in over a year. With inflation now above the Reserve Bank of Australia’s target band of 2-3%, the RBA will likely need to put a pause on its easing cycle. The Australian Bureau of Statistics identified housing, recreation and culture, and transport as the main drivers of inflationary pressures. A likely pause in easing further strengthened my case to stay long the Australian dollar (FXA).

I am now on heightened alert for sticky inflation becoming a global problem that justifies an extended run for the debasement trade.

A Pause in the Debasement Trade

As the Fed expresses hesitancy about cutting rates again in December, the debasement trade took a major pause going into the Fed meeting, perhaps in anticipation of a less dovish Fed. Given I think the Fed will feel compelled to proceed with cuts in December, I consider the pause in the debasement trade to be even more temporary than the inflationary pressure from tariffs. I have treated this sharp pullback as the buying opportunity I have (mostly) patiently waited for. When parabolic rallies finally lose steam, the pullbacks are often swift and steep. I am looking for support to hold for the SPDR Gold Shares (GLD) by the $350 level where the 50-day moving average (DMA) (the red line in the chart below) awaits testing.

Bond yields understandably spiked higher in response to the Fed’s balk on rate cuts. However, I am no longer interested in trying to fade rallies in the iShares 20+ Year Treasury Bond ETF as I now accept that the bond market’s overall trajectory is to worry much more about imminent economic weakness than lingering inflationary pressures.

The bond market is giving the Fed a green light for rate cuts. Thus, today’s balking should gradually transition to acceptance in the coming weeks.

Be careful out there!

Full disclosure: short GLD put, long GLD calendar call spread, long UPS, long AMZN put spread

The post Powell Balks At the Next Step of Hopeful Monetary Policy appeared first on Inflation Watch.

(Source: Australian National Accounts: National Income, Expenditure and Product. Complete statistical tables available from the Australian Bureau of Statistics)

In cutting its cash rate for the second time during this easing cycle, Bullock called the move a “confident” cut. As the chart below demonstrates (Source: The Reserve Bank of Australia, Consumer Price Inflation – G1), Australia’s inflation has returned to pre-pandemic norms. Bullock described a broad-based slowing in price increases, leading to a forecast for “the underlying pulse of inflation around the midpoint of the 2 to 3 per cent range over the next year or so.” With that trend firmly in place, she concluded: “with inflation declining and the unemployment rate relatively low, we’re well positioned to deal with” the challenges presented by the U.S.’s trade war with the rest of the world.

(Full inflation data at Consumer Price Index, Australia)

Stable Inflation Enables Renewed Easing of Monetary Policy

The U.S.’s trade war threatens renewed inflation pressures through global supply chain disruptions. The RBA is monitoring these developments closely, forecasting “growth in our major trading partners slowing over the remainder of this year and next year.” At the same time, it has revised its domestic growth forecast expecting the economy to grow “a little more slowly,” and sees “global trade developments” as mostly deflationary—aside from inflationary supply shocks from the trade war. These factors underlie the RBA’s confidence in continuing the rate-cutting cycle.

The RBA has also been transparent about its easing bias. Bullock noted: “if we were just looking at where the domestic economy was at the moment, would we be looking at lowering rates or not, and as I said earlier with inflation in the band and also employment doing pretty well, we think there is a bit of scope to lower interest rates.” Even with labor market tightness, she added, “it does seem that inflation is continuing to come down notwithstanding a bit of tightness in the labour market.” Moreover, “inflation is right on target from a six-month annualised point of view.”

Looking ahead, the RBA sees conditional room for further easing: “I think if we continue to observe inflation coming down and staying down sustainably, then to the extent that we think there’s still restrictiveness in monetary policy—and we think there is a bit—then that would give us opportunities to lower the interest rate further.” However, Bullock acknowledged that renewed strength in consumer demand could change the equation: “If it looks like things pick up much more quickly than we thought they would… then all the cost pressures that the businesses are saying, well, they might be able to pass them on. That might be the risk on the upside, and the question there would be for us: are we still restrictive enough to keep that under control or do we need a bit more restrictiveness?”

Risks: A Fog of Unpredictability

Still, global and domestic risks remain. Bullock was frank about the external backdrop: “the situation we’re in is it’s not just uncertain, it’s actually unpredictable.” While the Federal Reserve has remained frozen—on high alert for stagflation—Australia is benefitting from a policy window (that may close in unpredictable ways).

Domestically, the RBA continues to monitor labor market imbalances. Bullock noted that “employment growth, the participation rate, vacancy rates, all these sorts of things are suggestive of the labour market still being quite tight.” On the other hand, consumption has not yet responded as expected to rising real incomes and falling rates: “We’ve been a little bit surprised that consumption hasn’t recovered as real incomes have started to recover. It’s just a bit softer than we thought it would be if you think about historical relationships. We thought it would have done better. So that’s the risk, that households for some reason are being much more cautious than they have been in the past and that that is a downside for the economy.”

The RBA has also shown intellectual flexibility in revisiting its assumptions: “we are open to the idea that we may be overestimating, or underestimating full employment, and I think that’s a healthy thing for us.”

Even amid these uncertainties, Australia’s anchored inflation and resilient labor conditions help reinforce the Australian dollar’s appeal as a mispriced asset in a volatile global landscape.

Trade Shocks: The Global Wildcard

Although Australia has a handle on its domestic picture, external shocks remain a major variable. Bullock acknowledged that the RBA, “just like everyone else, was completely blown out of the water by the scale and the scope” of the U.S.’s trade war. “So we really had to go back and have a much harder look. So there has been a lot of analysis done… and the Board does have to consider and factor much more of this into their thinking than was the case back before this all happened.”

While the RBA braces for future trade war storms, the U.S. Federal Reserve is in the center of the storm. The Fed is bracing for staglfationary impacts from the trade war and, as a result, remains stuck with inaction even as current inflation falls further from the Fed’s policy rate. Australia, by contrast, enjoys the flexibility of acting on current data and trends.

Conclusion: A Value Currency with Upside

Australia is entering a policy sweet spot: inflation is within target, the labor market remains robust, and GDP growth is beginning to recover. The country’s policy flexibility and economic trajectory stand in contrast to that of the U.S., where a hawkish Fed is constrained by future inflation expectations and geopolitical risk.

From a currency trading perspective, the Australian dollar looks as a value currency—undervalued after years of economic drag and monetary tightening…even with concerns about Chinese growth.

The following weekly chart of Invesco CurrencyShares Australian Dollar Trust (FXA) (currency pair AUD/USD) shows 14-year pressure on the Australian dollar versus the U.S. dollar. assuming the pandemic lows hold, the time looks ripe for a sustained turnaround.

Be careful out there!

Full disclosure: long AUD/USD, long AUD/JPY

The post Inflation at Target and GDP Growth Recovery: A Comeback Case for the Australian Dollar appeared first on Inflation Watch.

The 15-minute chart of AUD/USD shows how traders rushed to buy in the wake of a surprise rate hike. The enthusiasm peaked within 3 hours. (Source: TradingView)

The RBA acknowledged that “inflation in Australia has passed its peak.” However, inflation at 7% is too high and “…while the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range.” This inflation horizon means the RBA could intermittently hike rates for quite some time as it scours the landscape for smoldering embers of inflation.

The current problem is in services price inflation. The U.S. also faces this challenge. Indeed, he RBA referenced global commonality in explaining the sources of stubborn highly inflation (emphasis mine):

“Goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of the pandemic disruptions. But services price inflation is still very high and broadly based and the experience overseas points to upside risks. Unit labour costs are also rising briskly, with productivity growth remaining subdued…Wages growth has picked up in response to the tight labour market and high inflation.”

The RBA further explained that the rate hike should firmly anchor medium-term inflation expectations. Tightening monetary policy is acting like an insurance policy against higher inflation expectations contributing “to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the historically low rate of unemployment.” Unemployment in Australia remains at a 50-year low. Thus, the RBA has plenty of room to continue tightening as needed…at least for now. The RBA acknowledged the challenge ahead in avoiding a recession while it tightens monetary policy:  “the path to achieving a soft landing remains a narrow one.”

The RBA concluded the May statement on monetary policy just as it ended the previous statement: “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.” In other words, the market will need to stay on its toes.

The Trade

The intraday surge in AUD/USD was not enough to punch the currency pair through important resistance on the daily level. AUD/USD remains trapped underneath resistance from all three major trendlines: the 20-day moving average (DMA) (dashed line), 50DMA (red line), and the 200DMA (blue line). Thus, I am neutral on AUD/USD until at least after I see how the market responds to the Federal Reserve’s turn to announce monetary policy.

AUD/USD has been stuck in a range for two months. Resistance from the 20DMA, 50DMA, and 200DMA are now capping upside. (Source: TradingView)

The Australian dollar versus the Japanese yen (AUD/JPY) is much more interesting, especially with the Australian dollar holding a significant yield advantage. The Japanese yen is suffering a fresh bout of weakness because the new governor of the Bank of Japan confirmed that he has little interest in tightening policy from ultra low rates. The double dose of yen weakness and Australian dollar strength hurled AUD/JPY right into overhead resistance at the 200DMA. A rush to the “safety” of the yen in the wake of fresh selling in the U.S.’s regional banks help send AUD/JPY in reverse. Still, while the 200DMA held as resistance, AUD/JPY is now making higher highs and higher lows with the 20DMA in an uptrend. The current 50DMA breakout could hold given this fresh momentum. (Recall that a bullish AUD/JPY has bullish implications for the stock market).

Overall, with the RBA on a path that could include higher rates for some time, I like buying the Australian dollar on dips on the assumption it has likely bottomed against the U.S. dollar and the Japanese yen. I am currently (re)accumulating AUD/JPY on this pullback in anticipation of an eventual retest of 200DMA resistance.

AUD/JPY has traded in a well-defined range all year. The latest uptrend is the latest opportunity to build enough momentum to break out. (Source: TradingView)

Be careful out there!

Full disclosure: long AUD/JPY, long FXA

The post Reserve Bank of Australia Revives the Ghost of Inflation Past appeared first on Inflation Watch.

The Australian economy remains quite strong. The RBA expects growth this year to hit 3.25% and 1.75% in 2023 and 2024. The slowing growth will not cause a significant boost in unemployment which is currently near 50-year lows. This strength gives the RBA room to continue hiking rates as planned. So it is a wonder that the Australian dollar is not faring better against its major rivals in the Japanese yen (AUD/JPY) and the U.S. dollar (AUD/USD). In particular, the Australian dollar looks like it is topping against the Japanese yen with the often dreaded head and shoulders pattern.

AUD/JPY is just one breakdown below the “neckline” away from confirming the topping pattern. (I almost arbitrarily drew the neckline at the point of the last meaningful, tested support level). In the meantime, I am actually betting on a near-term rebound in AUD/JPY before the head and shoulders pattern resolves itself to the downside or upside. The RBA’s monetary policy is racing ahead of the Bank of Japan, so I interpret the yen’s recent general strength as a counter-trend rally or even some kind of short-covering rally. Time should tell soon.

Full disclosure: long AUD/USD, long AUD/JPY

The post The Reserve Bank of Australia Looks Ahead to Peak Inflation appeared first on Inflation Watch.

“Inflation has increased in Australia, but it remains lower than in many other countries; in underlying terms, inflation is 2.6 per cent and in headline terms it is 3.5 per cent.”

Seeing that data, I wondered whether the soaring prices of commodity exports and the resulting stronger Australian dollar are helping tamp down inflation. The RBA mentioned neither of these potential drivers. Instead, the central bank fingered low wage pressures:

“Wages growth has picked up, but, at the aggregate level, is only around the relatively low rates prevailing before the pandemic…Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. “

This sluggish wage growth is giving the RBA the luxury of standing still on monetary policy. The statement gave no hint of a specific time horizon for tightening rates. The RBA is waiting for “…evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates.” In other words, wage growth is so slow that there are risks to the downside for inflation.

The Australian dollar reacted well in advance of and following the statement. A larger sell-off in financial markets the next two days reversed all the gains for AUD/USD.

Be careful out there!
Full disclosure: short AUD/USD

The post Low Wage Pressures Suppressing Inflation In Australia appeared first on Inflation Watch.

Now, thanks to a friend, I am ever closer to accepting that inflation may not be a problem for an even longer time than I expected. He sent me a link to an article called “The Fed won’t taper as long as inflation is low” (by Rex Nutting at MarketWatch) that makes the convincing case that not only is inflation low, but the Federal Reserve has so far seemed powerless to generate the inflation it wants. (I recognize the limitations of government data on inflation, but I do not subscribe to theories that they are concocted specifically to hide true inflation). Incredibly, core inflation is apparently at its lowest point since 1959 (the core PCE price index):

Nutting also links to a paper from the Federal Reserve Bank of New York called “Drilling Down into Core Inflation: Goods versus Services.” In this paper, authors M. Henry Linder, Richard Peach, and Robert Rich demonstrate that more accurate inflation forecasts come from breaking out CPI into a services and a goods component. Nutting uses this as reference for the claim that the Fed is failing because of global disinflation. This global disinflation is responsible for a decline in the prices of the goods component. Services inflation is much more sensitive to domestic forces (we all know about skyrocketing healthcare and education costs). However, I am not sure where housing sits on this spectrum. It seems to provide a crossroad of forces given housing is not tradeable but foreigners are certainly free to overwhelm a housing market with cash. Foreign demand is reportedly helping to drive up housing prices in some of America’s hottest housing markets like in California and some parts of Florida.

All this to say that, for the moment, inflation is all but dead. But “Inflation Watch”, this blog, is NOT dead. I remain vigilant because I believe that when inflation DOES come, the Federal Reserve will either be ill-equipped to handle it and/or unwilling to snip it early for fear of causing a severe economic calamity. I am a gold investor, and I am eager for another chance to invest in the midst of a commodity crash (I am LONG overdue for an update to my framework for investing in commodity crashes/sell-offs).

The chart below from the Reserve Bank of Australia (RBA) shows that commodity prices remain at historically high levels, mostly thanks to rapacious demand from China. The current relative decline is what is helping to drive goods inflation down. The 2011 peak was well above the pre-crisis peak where prices have fallen now. Also note that prices are much more volatile. I suggest that this chart should remind us that commodity prices are a tinder box that can flare up at anytime. Aggressive rate-cutting by the RBA should also help keep prices aloft.

So stay tuned. Just when everyone finally concludes that the world has reached a golden age of disinflation where surpluses abound across the planet…that could be the exact moment the tide turns.

Be careful out there!

Full disclosure: long GLD

The post Inflation May Be Dead, But Inflation Watch Is Not appeared first on Inflation Watch.

This amazing growth has come with costs, primarily in the form of higher labor costs. In “Lovesick Miners Raise Costs for Rio, BHP,” Bloomberg describes how the isolation of work in the remote mining areas makes these jobs very unattractive. Mining companies like BHP Biliton (BHP) and Rio Tinto (RIO) not only have to pay extremely high wages as compensation, but they also must include other perks to help miners deal with the isolation. For example, work schedules for miners can include extended trips to major cities in between extended shifts. Still, major shortages of labor exist in many skills. Australia will likely need to rely more and more on foreign workers to do these jobs – the isolation THOSE workers will feel will likely be many times what Australian miners feel. So, this dynamic will be important to watch.

Overall, this article is a fascinating look into the lives of Australian miners and how their work impacts their ability to gain and maintain relationships.

The post Australian mining companies struggle with higher labor costs appeared first on Inflation Watch.

“Wages grew 3.9 percent in the three months through December from a year earlier, the fastest pace since the first quarter of 2009, according to government figures. When the central bank decided March 1 to keep its official cash rate at 4.75 percent, it said wage growth had returned to levels reached before a 2009 decline.”

Bloomberg also reports that Australian unions are seizing this opportunity to press for higher wages:

“The Construction, Forestry, Mining and Energy Union, Australia’s biggest in the building industry, sought pay increases in February of as much as 24 percent over four years. The Communications, Electrical and Plumbers Union is seeking annual pay rises of 5 percent over the next three years, almost double the inflation rate.”

The article speculates that tight labor conditions and rising wages could place additional pressure on the Reserve Bank of Australia to restart its rate-hiking campaign. Such speculation could explain the Australian dollar’s rapid rise to new all-time highs against the U.S. dollar.

Disclosure: author is long FXA (Rydex Currency Shares Australian Dollar Trust ETF)

The post Wages in Australia Continue to Rise Strongly appeared first on Inflation Watch.

“…the moderation in inflation that has been under way for the past two years is probably now close to ending…the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today’s meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.”

Australia’s terms of trade are now around 60 year highs. The RBA also felt free to act given its assessment that “…concerns about the possibility of a larger than expected slowing in Chinese growth have lessened recently…The turmoil in financial markets earlier in the year has abated, though sentiment remains fragile.”

After holding interest rates steady for many months, it seems the RBA is getting ready for a series of fresh tightenings to maintain a lid on inflation pressures.

(Note: author owns FXA, the Rydex CurrencyShares Australian Dollar Trust ETF)

The post Reserve Bank of Australia tightens proactively to fight unwanted inflation appeared first on Inflation Watch.