Markets are convinced that the RBA will keep rates unchanged at the end of its policy meeting on Tuesday. This follows three back-to-back rate hikes, and will give the central bank time to assess the impact of recent monetary policy adjustments. But, markets will be paying close attention to the meeting and its outcome to see if or when the rate hikes will resume.
After the last meeting, the RBA heavily implied that there was “room to pause”, which has left the market giving 95% odds of a hold. It typically takes up to six months for changes in monetary policy to filter through the economy and show up in the data. So, a pause after three hikes is logical. But, the impact on the currency is what matters for forex traders, and that’s likely to depend more on the outlook.
More Gains in Sight?
Despite expectations for a pause, the AUD has remained on solid footing over the last week. Even against the greenback, which saw gains over the last few days amid a shift away from risk, the Aussie has managed to hold its own. Part of that can be attributed to a shift on the American side as markets began to see a Fed hike this year less likely. Another, more substantial part, can be attributed to solid trade figures from China. Australia’s main customer, it seems, continues to show resilience amid the geopolitical situation.
US President Donald Trump’s announcement on Thursday that a deal with Iran is imminent could be particularly beneficial for the AUD. Of course, this is not the first time we’ve heard that a deal to open the Strait of Hormuz is just days away. But, if it is, Australia as a net importer of refined fuels could stand to benefit from lower crude prices, reducing some of the capital outflow and further buttressing the currency.
Aussie Unique Situation Supports Currency
Notably, the RBA was already in hiking mode even before the conflict in the Middle East broke out. This allows it to take a pause while most of the other central banks have to hike ahead of inflation pressure. But, it also means the RBA is addressing a domestic issue instead of a (hopefully) transitory external supply shock.
The main problem that the RBA has is the high price of housing in Australia. House prices (and rent) just keep rising despite rate hikes due to structural supply issues in the market combined with resilient wage growth. Normally, the central bank has a lot of control over housing prices, since its policy almost immediately and directly affects mortgage prices. But, the RBA is struggling to direct the housing market, which means, regardless of what happens in the Middle East, it could continue to hike.
Higher Rates in the Future?
Traditionally, the RBA has maintained higher interest rates than other major central banks, and it appears that tradition is reasserting itself. As a main supplier to the vibrant Chinese economy, Australia could continue to maintain growth above its peers. With export-driven growth, the currency could remain elevated as the central bank tries to cool the economy with higher rates.
Those higher rates can encourage carry traders and surge capital inflows, which would further prop up the currency. As long as the fundamentals remain in place, a resolution of the Middle East situation could unlock a virtuous cycle for the Aussie as other central banks ease off on hiking.
