The RBA cash rate remains below the Fed funds rate by a considerable margin, an ongoing headwind for AUD/USD. Markets price about an 80% chance of the RBA raising the cash rate by 25bp to 3.35% on 7 February and the cash rate is seen peaking around 3.55-3.60%
Such pricing could move substantially if Australia’s Q4 CPI data surprises. Westpac looks for prices to have risen 1.5%qtr, 7.4%yr, with the ‘core’ trimmed inflation rate 1.6%qtr, 6.6%yr. This should be the cycle peak for inflation. Consensus is close to our forecasts, but there is always potential for surprise in components with little partial data.
While the Aussie faces the risk of a soft CPI sparking calls for the RBA to pause in its tightening, the commodity outlook seems lower risk than usual this week, if only because mainland China markets are closed all week for lunar new year holidays. - Westpac
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