// Preface //
Breaking news!
The Australian dollar has surged,
but the bad news is...

Australian Dollar Soars
Australia May Face Interest Rate Hike

Breaking! The Australian dollar has surged!

The Australian dollar has risen for three consecutive days, recording its largest gain in recent days yesterday. As of writing, it has climbed to 0.66 against the US dollar and 4.67 against the Chinese yuan.

This recovery is primarily driven by economic data released yesterday.

Yesterday, the Australian Bureau of Statistics released third-quarter economic data. The figures show the economy maintained its upward momentum, with annual growth hitting its fastest pace in two years.

Data from the Australian Bureau of Statistics indicates that Gross Domestic Product (GDP) grew by 0.4% this quarter, falling short of market expectations of 0.7%. However, the annual growth rate reached 2.1%, the fastest in two years.

Behind this seemingly positive outlook lie lurking pressures of inflationary rebound, which have completely shifted market expectations for monetary policy. Expectations for interest rate cuts have stalled, while anticipation for rate hikes is heating up.

Reserve Bank of Australia (RBA) Governor Michele Bullock warned:
If inflation remains persistently high, it will significantly impact future monetary policy.

It's worth noting that the annual growth rate slightly exceeded the RBA's forecast of 2%. This figure represents the maximum growth rate the central bank believes the economy can sustain without fuelling higher inflation.

Treasurer Jim Chalmers stated: "Growth and private sector activity are picking up, unemployment is low, participation is high, employment is increasing, and real wages are also growing."

However, despite meeting economists' expectations, the highest annual growth rate in two years remains well below the pre-pandemic 20-year average of 2.9%.

Looking at more specific data:
Productivity growth improved to 0.8% in the September quarter, nearing pre-pandemic levels but still below the Treasury's medium-term productivity growth expectation of 1.2%.

Household spending continued to rise, with quarterly growth of 0.5%, mainly due to a 1% increase in essential spending on insurance, rent, and food, while consumers reduced non-essential consumption.

Excluding a decline in tobacco spending (which fell as buyers shifted to the illicit market), the consumption growth rate improves to 0.6%.

The moderate economic upturn pushed annual headline inflation up to 3.8% in October, exceeding the RBA's target range of 2% to 3%.

Economists and markets have now abandoned expectations for rate cuts, instead anticipating the next move will be a hike.
The bond market currently predicts only a 5% chance of a rate cut by February, but an 87% chance of a rate hike by the end of next year.

Commonwealth Bank economist Belinda Allen noted that, at the current pace, the economy has already reached its speed limit.

The economic situation is solid. With inflation rising and domestic momentum strengthening, the central bank faces a difficult task. Rate cuts are off the table for now, and the possibility of a rate hike next week to curb inflation cannot be ruled out.

Additionally, the US ADP employment report (the "small non-farm payrolls") released last night turned negative, missing expectations and indicating a softening labor market. This has increased expectations for the Federal Reserve to proceed with a rate cut next week as scheduled. Coupled with rising expectations for an Australian rate hike, the Australian dollar continues to strengthen.

Finally
The RBA's December monetary policy meeting next week will become the focal point for market attention.
The challenge for the RBA moving forward will be maintaining economic growth momentum while effectively curbing the rebound in inflation.