Can the Australian Dollar’s Latest Drop Undermine the RBA’s Inflation Fight Further?

Highlights:

• The Aussie fell below US$0.69 as weak local surveys and US rate expectations weighed.
• Markets see an 82% chance that the RBA’s rate increases have peaked.
• A weaker currency could lift import costs while Australia’s inflation remains elevated.

The Aussie remains under pressure

The Australian dollar traded below US$0.69, touching a seven-month low as poor domestic survey results and a stronger US dollar weighed on sentiment. Market data shows exchange rate at 0.68434, down 0.33% on the day and 1.66% over the month, although it remained 4.62% higher over the year.

Consumer confidence fell to a four-year low in November, while business conditions stayed in negative territory at a level last seen six years ago. The readings add to concern that households and businesses are becoming more cautious as higher interest rates and living costs weigh on the outlook.

Diverging rate expectations weigh on the currency

The Reserve Bank of Australia (RBA) has raised its cash rate five times this year, taking it to 4.85%, an 18-year high. But markets increasingly expect the tightening cycle to be over: pricing implies an 82% probability that rates have peaked, with a quarter-point cut fully priced in by the end of 2027.

In the United States, October core inflation rose 0.3%, while the headline consumer price index increased 0.4% month on month. Federal Reserve policymakers’ firm tone has prompted markets to consider whether the Bank could deliver a larger rate rise in December. The contrast between expected RBA easing and possible Fed tightening has supported the US dollar and left the Aussie exposed.

Imported prices are the next concern

A weaker Australian dollar can make imports more expensive, though the pass-through to consumer prices varies and can take time. That adds to the RBA’s challenge: its November outlook projected headline inflation would remain above 3% until late 2027. The central bank must weigh this risk against weak confidence and the pressure that restrictive rates place on activity.

Australian employment data on 19 November and monthly inflation figures on 25 November may influence expectations ahead of the RBA’s 8 December meeting. Until those releases clarify domestic price and growth pressures, the Aussie is likely to remain sensitive to local data, commodity moves and signals from the Fed.

Note- All data presented is based on information available at the time of writing.

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