The AUDUSD appeared to be in trouble with a decline of more than -4% in just 3 sessions.
Most stock markets opened Tuesday’s trading flat to down, but the FTSE was reasonably robust with a rise of +0.5%, aided by a significant recovery in oil, which is +2% on the day. Similar to currencies, currencies are mixed, with the Yen and Australian Dollar both rising versus the USD by 0.6% and 0.7%, respectively, while EURUSD and GBPUSD remain absolutely flat. This has assisted AUDUSD in regaining some of the sharp loss it had over the previous three sessions, which saw it fall from 0.715 to 0.685, a decrease of more than 4%.
RBA Maintains Aussie Stability
The USD’s recent reversal was the main cause of the recent downturn, but there was also concern over a potential dovish RBA.
There was a lot of anticipation that this language would be changed or “diluted,” maybe to something like “The Board is prepared to boost interest rates further…”
There were other subliminal cues that the hawkish viewpoint was still there, including the fact that the sentence was left unaltered, which was evaluated as more hawkish than predicted.
Other components of the message, according to Westpac, “that might be regarded as more hawkish than the December Statement.”
“Even while it was acknowledged that global inflation was reducing due to supply-side adjustments, the Board’s outlook for inflation has not been revised downward since the November Statement on Monetary Policy (SoMP).
Some may have been caught off guard because many experts and traders were anticipating a break in the raising cycle fairly soon; the Australian Dollar has risen as a result. There is a fair likelihood of one more rise in May to bring the cash rate to 3.85%, and a 25bps hike appears very inevitable at the next meeting in March. Markets are now anticipating a top rate of 3.9%, up from 3.6% before the announcement, although we believe this still understates the RBA’s actual intentions. According to our predictions, rates will reach 4.1% in the second quarter and may not be dropped for the first time until the fourth quarter.
Of course, a lot will rely on the data collected between now and then, and Australia faces the same concerns as other nations given the continued high inflation of services and the tight labor market that is driving up wages. With its statement that had a hawkish slant, the RBA conceded that inflation appeared to be sticky.
More dovish expectations from institutions like the ECB and BoE, which said this week they believed UK inflation had “turned a corner” and that a halt may be imminent, might potentially be a positive factor. The “Aussie” might do very well if other central banks decide to hold off while the RBA continues with two or three more rate increases.