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.

Thus, Goolsbee has “put concerns about the job market aside”. His focus is on inflation.

As President of the Chicago District, Goolsbee is reacting to the observations and concerns of his Midwest constituents across Iowa, Illinois, Indiana, Michigan, and Wisconsin. He cited concerns about costs and affordability. However, the January Beige Book entry for Chicago did not describe any notable levels of concern as follows:

“Prices rose moderately on balance in late November and December and contacts expected a similar pace of growth over the next 12 months. Producer prices rose moderately. Nonlabor input costs rose moderately, with contacts highlighting higher costs for energy (particularly electricity) and raw materials. Manufacturing contacts continued to attribute some increases in raw materials prices to tariffs, while a few construction contacts reported little effect of tariffs on their operating costs. Consumer prices rose moderately, and one retail industry analyst said that to date about half of tariff-related cost increases had been passed through to consumers.”

These “moderate” observations from January are almost identical to the descriptions from the November Beige Book.

The Fed’s contacts in the Chicago district appear to support Goolsbee’s lack of concern for the labor market. They expect a slight increase in employment in the next 12 months. So far, gains in hospitality employment have compensated for further contraction in manufacturing employment. Employers are focused on replacing retirees and citing overall sufficient worker availability. In the CNBC interview, Goolsbee pointed squarely at the uncertainty driven by government policies as the source of employment weakness. The Fed cannot address this kind of uncertainty with lower interest rates; monetary policy acts in an economically cyclical way

The Fed is unable to address non-cyclical issues. Goolsbee suggests as much when he points out that “low hiring and slow firing is not what the business cycle looks like”. Instead, a business cycle features high layoffs along with low hiring.

Goolsbee’s observations and assessments clearly plant him firmly against rate cuts for the foreseeable future.

Conclusion

Goolsbee sounds about as entrenched in his position as are the most dovish members of the Fed who believe rate cuts are necessary to support the labor market. Thus, the stage remains set for growing acrimony as monetary policy moves cautiously ahead of the arrival of a new Fed Chair who presumably will be under orders to get rates much lower as a condition for the nomination. The jobs picture as outlined by Goolsbee will make such a dovish push quite difficult to explain.

So while it seems unlikely the Fed will deliver the surprise rate cut this January, I think the overall trajectory of a dovish bias for the Fed keeps expectations solid for an economy running on the hot side with policy combined with a surplus of fiscal stimulus. Thus, I continue to like the commodities portion of my shopping list for 2026.

The post The Fed’s Labor Market Divide Is Hardening Against Rate Cuts appeared first on Inflation Watch.

The Carry Trade

Simply put, the carry trade is the act of borrowing in a currency with low interest rates and using those funds to buy assets with higher rates or anticipated returns (like stocks). The Japanese yen became an “easy” carry trade for big investors because the Japanese yen (FXY) had near zero interest rates. Once the Fed started hiking rates, traders could earn increasing returns by borrowing in yen and buying U.S. bonds. After equity markets bottomed in October, 2023, traders could earn increasing return borrowing yen to buy stocks (at least one analyst thinks the carry trade has been in effect since the rebound from the Great Financial Crisis!). Crypto currencies are even acting like they have been caught up in this massive delveraging. At the time of writing Bitcoin (BTC/USD) is down around 24% in just 8 days and looks like it could soon reverse all its gains since the SEC approved Bitcoin spot ETFs.

The strength in the yen and the presumed unwind of the carry trade has been breathtaking over the last two weeks. The Australian dollar versus the Japanese yen (AUD/JPY) has fallen around 17% in the three weeks since its last peak. AUD/JPY now sits at levels last seen in early June, 2023. AUD/JPY has long been my favorite currency market indicator of sentiment in the stock market. However, the current decline happened so rapidly, that I had no time to adjust my mind to appreciating that AUD/JPY suddenly mattered again in a significant way. After all, the Bank of Japan “only” hiked its target rate from 0% to 0.25%. The hawkish tone of the BoJ on normalizing policy must have traders scrambling to get completely out of the way of future rate hikes.

So what now?

Financial markets are essentially in panic mode. It is near impossible for the stampeding herds to see the other side of this major market disruption. As a contrarian of extremes in financial markets, I am compelled to lean the other way even though market breadth in the stock market still needs to fall significantly to hit oversold levels. Thus, I cannot buy as aggressively as I normally would…”nibbling” is my modus operandi for now (I am also re-accumulating cryptocurrency positions like BTC/USD).

In currency markets, I slipped on my well-crafted trading strategy on the Japanese yen. I gave up on the short GBP/JPY too early, and got overly confident in what looked like the obligatory rebound for USD/JPY side. So, in recent days, I have raced to keep up with new short GBP/JPY positions and have been simply astounded by how fast these positions hit profit targets. This clearing in turn forces me to reload at lower prices as the Japanese yen keeps racing away. Last week, I even dabbled in shares and call options in Invesco CurrencyShares® Japanese Yen Trust ETF (FXY). At SOME point, this non-stop slide in yen currency pairs will end and give way to a (potentially) abrupt and vicious countertrend relief rally. That time will offer a brief opportunity to bail on short yen positions and then step aside to catch a few breaths!

Be careful out there!

Full disclosure: long AUD/JPY, long USD/JPY, short GBP/JPY, long BTC/USD

The post The Carry Trade Sweeps the Sahm Rule Aside appeared first on Inflation Watch.