Australian Dollar Can Remain Supported, Despite This Inflation Undershoot

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An analyst we follow says he continues to look for Australian Dollar strength, despite Australia's monthly inflation reading undershooting expectations.

Christopher Wong, a strategist at OCBC Bank, says any Australian Dollar weakness should be viewed as being "corrective" in nature and that further upside should be expected.

"Buy dips," says Wong, in the wake of news from the ABS that Australia's year-on-year inflation (the weighted mean version) printed at 4.30% in November, which is down from October's 4.90% but below expectations for 4.40%.

The OCBC analyst says the slowdown in inflation dampens rate hike expectations, "but even with the slowdown, inflation remains well above RBA's 2.5% target and services inflation remains sticky."

The RBA surprised with an interest rate hike in November over concerns that inflation is taking too long to fall back to target, signalling that Aussie interest rate cuts are some way off.

The hike coincided with a strong fourth quarter for the Aussie Dollar, and analysts say further outperformance can be expected if the RBA lags its global peers in cutting interest rates.

"Policy divergence between RBA with Fed should keep AUD better bid," says Wong.

The Australian to U.S. Dollar exchange rate is at 0.6708 at the time of writing, with price action showing markets are looking through the undershoot in monthly inflation.

Above: AUD/USD and GBP/AUD (lower panel), shown at daily intervals.

The Pound to Australian Dollar exchange rate has capitalised on the Aussie's weak start to 2024 but is down on the day at 1.8971.

OCBC's strategists are constructive on AUD's outlook, looking for AUD to try 0.7050/0.71 by the end of the year on the back of central bank policy divergence, commodity price upticks and very tentative signs of stabilisation with the Chinese economy.

A move in AUD/USD to such levels would pressure GBP/AUD lower, but the scope of downside would be limited if GBP/USD also performs strongly over the coming months.