The Australian Dollar's Future Could Be Revived by the RBA. Is it Better to Hike or Not to Hike?

Tips

• On the back of robust commodities, the Australian dollar is testing previous highs.

• The RBA may be on track for a May rate hike if CPI surprises to the upside.

• Central banks intervene when transient inflation becomes entrenched.

The Australian Dollar has been bumping up against resistance levels, despite the fact that the Australian economy's basic fundamentals remain robust.

The currency is supported by a backdrop of rising commodity prices and a relatively solid national balance sheet.

By historical measures, the Australian dollar has depreciated since the float in 1983, while the terms of trade have remained multigenerational highs. This has a beneficial effect on the home economy.

Australia has enjoyed extraordinary prosperity since the RBA was authorized with an inflation targeting framework in 1993. While political parties of all stripes would like to claim credit for the positive outcome, the reality is that the central bank's prudent management has been critical in preserving the nation's riches and economic health.

The RBA is expected to encounter a hurdle at its May 3rd monetary policy meeting, but it is one they have faced previously. Australian CPI data will be released on April 27th, and all indicators are that it will likely shoot the lights out. Prior to May 21st, a federal election will be place.

The market is pricing in a slim possibility of a May hike but a significant probability of the first rate hike in June. The RBA said following its February meeting that it will wait until the first-quarter CPI statistic is released before making a rate decision.

The market appears to believe the RBA will postpone its decision until after the election. They increased rates right before an election in 2007. If the CPI rises above a certain level, history shows they will act.

Complicating matters is the US Federal Reserve's egregious policy blunder. The argument that inflation caused by 'cost push' is 'transitory' has been disproved.

The RBA has the track record and playbook to contain inflation before it reaches 'eye watering' levels. May's meeting could very well be 'live' for a CPI-dependent rate hike.

With a more hawkish RBA, the Australian dollar might trade above long-term norms.

Since The 1983 Float, The AUD/USD Has Regressed.

AUD/USD Regression Since The Float In 1983