Australian Dollar Bright Start in 2023

The Australian dollar projected through the first week of the year with an average daily range over two percent on each active trading day. After all the noise, it finished around one percent higher for the week.

The Australia dollar has started 2023 strongly, rising above 70 cents to highs since August. A softer USD and improved China sentiment have been key. This week‘s highlights include Australia’s jobs data, the Bank of Japan decision and US retail sales.

The AUD has risen about 1.6 cents or 2.3% so far in January, to just under 0.7000. Price action was quite mixed in the first few days of the year, the Aussie rally only igniting on 6 January when the USD slumped in response to soft data. While the US December payrolls gain of 223k was quite solid and unemployment rate edged down to 3.5%, there was a declaration in wages growth. Moreover, on the same day the US services ISM survey showed a shocking slide in the headline index, to 49.6 in December from 56.5 in November.

The factors that contributed to the volatility appeared to be largely external with Chinese policies, Federal Reserve meeting minutes and US jobs data all playing a role.

Adding to the softer US dollar tone was last week‘s US December inflation data. Overall CPI slowed to 6.5% from 7.1% in November, while the ex-food and energy CPI eased to 5.7% yr from 6.0%. There is clearly a long way to go to the Fed’s 2% target, but economists found signs in the reports details indicating ongoing softening in inflation pressure.

The improved China mood is helping AUD on crosses, including AUD/NZD rallying above 1.09, from around 1.05-1.06 in mid-December. Any pronounced weakness in China‘s Q4 GDP or December activity data seems likely to be downplayed as old news, given the pace of change in China’s Covid rules.

The impact on markets is that Chinese economic activity may not accelerate as fast as had been hoped for.

Australias key data release this month is Q4 CPI on 25th January, but there is always market interest in the monthly labor force survey. Westpac looks for a 30k rise in total employment, keeping the unemployment rate at a very low 3.4%.