The Reserve Bank of Australia Looks Ahead to Peak Inflation

The peak inflation narrative has become quite popular with those who look for rapid reversions to the mean. Indeed, the Fed may have broken the back of inflation, even as the June CPI (Consumer Price Index) broke the hopes of peak inflation for one more month. Australia is apparently still climbing the hill toward peak inflation. In its latest statement on monetary policy, the Reserve Bank of Australia (RBA) projected peak inflation later this year. Overall, the RBA’s “central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.”

The Australian economy remains quite strong. The RBA expects growth this year to hit 3.25% and 1.75% in 2023 and 2024. The slowing growth will not cause a significant boost in unemployment which is currently near 50-year lows. This strength gives the RBA room to continue hiking rates as planned. So it is a wonder that the Australian dollar is not faring better against its major rivals in the Japanese yen (AUD/JPY) and the U.S. dollar (AUD/USD). In particular, the Australian dollar looks like it is topping against the Japanese yen with the often dreaded head and shoulders pattern.

The Australian dollar vs the Japanese yen (AUD/JPY) is looking toppy with a broad, 5-month umbrella from the bearish head and shoulder pattern.

AUD/JPY is just one breakdown below the “neckline” away from confirming the topping pattern. (I almost arbitrarily drew the neckline at the point of the last meaningful, tested support level). In the meantime, I am actually betting on a near-term rebound in AUD/JPY before the head and shoulders pattern resolves itself to the downside or upside. The RBA’s monetary policy is racing ahead of the Bank of Japan, so I interpret the yen’s recent general strength as a counter-trend rally or even some kind of short-covering rally. Time should tell soon.

Full disclosure: long AUD/USD, long AUD/JPY