Last night, I bet on an increase in the AUD-USD exchange rate after reading analysis that the currency pair was seeing resistance around 0.7500 USD with lows between .7440-.7480 USD. While inflation in Australia is lower than in the United States (3.8% vs 5.4%), what helped tip me to the buy side was the higher yield on Australian 10-year government bonds (1.76%) versus the United States 10-year (1.63%).
Bank rates in Australia are slightly lower which tells me that their banks have a little more incentive to lend, which they may need given an expected slow retraction in inflation with expectations at 3.1%.
Meanwhile in the United States, Treasury secretary Janet Yellen and Federal Reserve chair Jerome Powell expect inflation concerns to dissipate next year.
Personally, I suspect that if there is any inflation it will be in certain areas of the labor market. I believe businesses with any vision will put in place labor work arounds where they will not require people to come into offices. Professional, “creative” type employees will be able to demand higher salaries while low wage earners will drive down earnings as they compete with more low-wage, unskilled workers.
Back to Australia, again, expect the inflation print tonight. I will be listening to how other central banks react. The news may temper the level of rate hikes they put in place. Just a thought …