Australia Should Push Interest Rates Higher In May

Wage growth in Australia has lagged some economic indicators in the rest of the economy. It is my belief that the trend will turn. The RBA held rates for the month, but the projected May increase for interest rates in AU will be on target. This will propel the AUD higher versus some of its counterparts.

Wage growth has been slow comparatively. The year-over-year pace is below 2.0%. However, compare the two charts above. In the series of charts, the first chart is the wage growth and the second chart is the rate of inflation for Australia.

Inflation has been moving higher around the world on an annual basis. This trend is rapid. In the United States, CPI moved from 0.8% in July to 2.7% just this month. That is a robust move. This trend is repeating around the world. Australia is very likely to see the same inflation growth rates move as well.

Those inflation growth rates are likely to work their way into wage growth rates, much as the very same thing has happened throughout the rest of the world. In fact, if you take a look at Australian employment, those numbers are increasing as well, as this chart shows:

The growth rate is firm with employment, as well. Again, this will increase price pressures moving forward. That will push the hand of the RBA. The bank has eluded to a move likely to happen in May. Most central banks around the world are reversing their course with regards to interest rates, so, seeing the RBA get on the same track makes sense.

But, everything is relative. I believe the United States is going to see very high interest rates, higher than most imagine. I believe Australia's interest rates will move upward as well, but China, I think is likely to remain stuck for a long time to come with their economy. That may underpin the Australian economy, in general. Again, however, there is a relativity involved. Australia's economy was pushed into an unhealthy expansionary level because of China's insatiable appetite for commodities. That is over. AU will likely see their economy expand at normal levels and be less dependent upon commodity exports.

Here is where the relativity that I spoke about comes in to play. With AU interest rates heading higher, Japan and EU rates are also likely heading higher, but at a slower, more gradual pace. That is the opportunity for anyone looking for a move in these crosses.

SeekingAlpha

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