AUD/USD Steadies After Banner Day

01/05/2023

1 minute read

2023.01.05 13:12

MarketPulse

The Australian dollar posted limited losses on Thursday. In the European session, is trading at 0.6822, down 0.17%.

Australian dollar soars as China mulls coal imports

The Australian dollar rocketed higher on Wednesday, rising 1.6% and hitting a 3-week high. This followed reports that China was considering easing its ban on imports of Australian coal. The ban has been in place since 2020, but relations between Australia and China have improved since the new Australian government took office. The move would bolster the Australian economy, although the Australian government was surprisingly low-key, saying that the coal industry had found alternative markets.

China is Australia’s number one trading partner, which means that developments in China have a significant impact on Australia and the direction of the Australian dollar. The sharp U-turn in China’s COVID policy, from zero-COVID to easing restrictions should give a boost to the Chinese economy in the long term. However, we can expect China’s economy to slow down and even contract in the first quarter, due to the surge in COVID cases which is dampening demand for services and also lowering production as many workers report in sick. This could pose a major headwind for the Australian dollar early in 2023.

The Federal Reserve minutes reflected the hawkish message that Jerome Powell had for the markets at the December meeting. FOMC members committed to maintaining a restrictive policy while inflation remained unacceptably high, saying that more evidence was needed to show that inflation was on a “sustained downward path to 2 percent”. The minutes noted that several members warned against “prematurely loosening monetary policy”.

Despite the Fed’s hawkish stance, there is still a dissonance between the Fed’s message and market pricing. The noted that no FOMC members expect any rate cuts this year, while the markets have priced in a possible small reduction by the end of 2023 and have forecast a funds rate peak at 4.5%-4.75%. The Fed, on the other hand, expects rates to hit 5% or higher. Minneapolis Fed President Kashkari said on Wednesday that rates could rise to 5.4% or even higher if inflation doesn’t head lower.

AUD/USD Daily Chart