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- Wage hikes to support AUD

- Labour market remains strong

- High household debt and global turmoil pose risks

The Australian Dollar is set to rise as rising wage pressures begin to bite, say analysts at CIBC, the global financial services provider and Canadian-based lender.

Higher wages increase inflation and put pressure on the Reserve Bank of Australia (RBA) to raise interest rates. Higher interest rates - or the expectation thereof - tend to appreciate the local currency, by drawing greater inflows of foreign capital because of the promise of higher returns.

Wages in Australia are now rising at a rate of 2.3% according to the latest data for September, the fastest rate of growth since 2015, and compared to a broad inflation rate of 1.9% or core rate of 1.8%, show real wages are rising by between 0.4% and 0.5%.

The sudden jolt higher in September appears to be partly due to the economy starting to reach 'full capacity’ and also an increase in the minimum wage by 3.5% implemented in July, which raised the earnings of 25% of the working population.

source: tradingeconomics.com

“Risks to domestic wages are higher given that capacity utilization has recovered to levels that have justified rate hikes in the past,” says CIBC in a note on the subject.

Despite the pickup in wages CIBC still does not expect the RBA to raise interest rates until the second half of 2019, because of other constraining factors within the economy.

The high average indebtedness of Australians is a major consideration. If the RBA were to raise interest rates in such an environment it could trigger an unwelcome escalation in defaults.

Ultimately the RBA has said it would like to see even higher wages of around 3.0% before committing to raising interest rates to be sure consumers could afford the higher loan repayments.

The current wage situation contrasts markedly with that at the start of the year when wages could barely keep pace with inflation, resulting a fall in real pay. This came despite companies enjoying record profits.

In February Philip Lowe, the governor of the RBA took the unusual step of entering on political territory by suggesting "it would be a welcome development" if wages began picking up substantially because it would create a better sense of "shared prosperity".

Wages are not the only factor driving the Australian Dollar higher. An easing in trade relations between China and the U.S. has also propelled the Aussie higher in recent weeks. China is Australia's biggest trade neighbour so anything which benefits the Chinese economy benefits Australia symbiotically.

Hopes that an informal meeting between Presidents’ Trump and Xi at the G20 will result in the beginning of an agreement are also supporting the currency, as is a general uplift on global risk sentiment on the back of the easing geopolitical risk in general.

CIBC forecast AUD/USD to rise to 0.74 by year-end, 0.75 by Q1 2019 and 0.76 by Q2 2019.

GBP/AUD is forecast to be at to 1.78 at year-end, 1.81 by Q1 2019 and 1.84 by Q2.

Technically Speaking

The outlook for GBP/AUD remains more constructive as the pair continues rising within an ascending channel over the medium-term.

Whilst the pair has lost ground in recent weeks, a recovery is underway so far this week, and most analysts still believe the Pound will eventually rally as the UK will get some sort of a deal before leaving the EU even if it is at the 11th hour.

Yet assuming CIBC's bullish Aussie hypothesis is right for GBP/AUD as well as AUD/USD, a major bearish signal for Sterling-Aussie would come from the pair breaking below the August lows at 1.7290.

Such a break would provide confirmation of more downside to at least the lower border of the rising channel at about 1.70. A break below channel would precipitate and even deeper sell-of to circa 1.6750.

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