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Aussie Off to a Bright Start in 2023

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

The Australian dollar 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 US dollar slumped in response to soft data.

While the US December payrolls gain of 223k was quite solid and the unemployment rate edged down to 3.5%, there was a deceleration in wages growth (4.6%yr versus 5.0% expected). 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.

Adding to the softer US dollar tone was last week’s US December inflation data. Overall CPI slowed to 6.5%yr from 7.1% in November, while the ex-food and energy CPI eased to 5.7%yr (low since December 2021) from 6.0%. There is clearly a long way to go to the Fed’s 2% target, but economists found signs in the report’s details indicating ongoing softening in inflation pressure.

This of course added to expectations that the Fed would further slow the pace of its monetary tightening. Markets now price only 55-60 basis points in further rate rises over H1 2023 (4 meetings). However, the projected yield peak of around 4.90% is still higher than the equivalent of most other major currencies, certainly including the Aussie (RBA cash rate seen peaking near 3.75% in Q3 2023).

But the Aussie has also found some support from improved China sentiment. Spot iron ore has jumped from $111/tonne on 23 December to $126 on 13 January, a high since June 2022. The LME base metals index is also at highs since June, having risen 7.2% so far this year. China equities are up about 7% so far in January, Hong Kong shares +10% as Covid restrictions continue to be eased. 

The improved China mood is helping A$ 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 (due Tuesday) seems likely to be downplayed as old news, given the pace of change in China’s Covid rules.

The other notable international events are US retail sales data and the Bank of Japan decision. The yen is even stronger than the Aussie YTD, as anticipation grows for another BoJ policy tweak after the December surprise widening of the 10-year bond yield range to -0.5% to +0.5%.

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

Event risk

US holiday (Martin Luther King Jr birthday) (Mon), Aust Jan Westpac consumer sentiment, China Q4 GDP, Dec industrial production and retail sales, Germany Jan ZEW investor sentiment, UK Nov unemployment (Tue), Bank of Japan policy decision, UK Dec CPI, US Dec retail sales (Wed), Aust Dec employment (Thu), Japan Dec CPI, UK Dec retail sales (Fri)

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