The AUDUSD has fallen to multi-week lows, and has generally been trending lower for over a month. Next Tuesday is a crucial juncture for the currency, when the RBA is expected to raise rates again. The question for traders is whether it will prove to be a catalyst to turn the currency around, or will the current trend persist?
With most major central banks on a rising track, merely hiking rates is now not enough to prop up the currency. If investors suspect that the central bank will hike and then pause, it can leave the currency falling behind its peers. In Australia’s case, recent strong data has left the market pricing in a substantial amount of RBA tightening. The problem is that if the central bank tightens too much, the economy can falter. At that point more hikes are seen as negative for the currency. So, how will the market after the next RBA rate decision?
Fourth Time Is the Charm?
The RBA has already raised rates three times this year, but inflation remains stubbornly above the 2-3% target. The most recent CPI reading came in at 3.5% and the central bank’s preferred measure, the trimmed-mean, was even higher at 3.6%. Australia was already on a hiking cycle before energy price pressures from the war in the Middle East added fuel to the fire.
Markets are pricing in 100% odds of a hike at the end of the meeting on Tuesday, and economists are in agreement. All off the “Big Four” banks in Australia are also expecting a hike (though, to be fair, it wouldn’t be the first time the RBA went against expectations of the big banks). This means that the market will likely focus on what to expect after the meeting, and, particularly, what Governor Michele Bullock signals for the future of rate hikes.
Gauging the Tone To See the Market Move
In her last comments before the meeting, Bullock acknowledged that the economy was slowing, but suggested that upside risk of inflation was more pressing. Markets will be looking to see if she reiterates that tone, which could suggest more hikes are coming, supporting the AUD.
If, on the other hand, she shows more concern for economic growth, then the market might price in a pause at the next meeting. This would likely weigh on the AUD, given that the market is already pricing 40% odds of more tightening at the November meeting. With many of the other major central banks expected to hike at least once more this year, the AUD could come under renewed pressure if the RBA doesn’t provide a clear signal that more hikes are coming.
Australian CPI Still the Focus
Given the solid consensus from the markets, it’s quite possible that the currency could be fairly stable after the decision if the RBA delivers as expected. The larger catalyst for the AUDUSD might actually be a day later, with the relase of Australian CPI on Wednesday. This will provide useful insight into what to expect from Q3 inflation figures, which will be crucial for the RBA’s November decision.
The market is expecting headline inflation to rise to 3.6% from 3.5% a month earlier, matching the unchanged trimmed mean rate. This would keep the RBA on a hawkish bias. But an unexpected drop in CPI data could prompt markets to price out a rate hike in November, weakening the AUD.
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