The AUDUSD is coming off of multi-week highs that it scored late last week. Part of that can be attributed to a technical pullback after the spike higher on Thursday that failed to carry through. But, there have been some shifts in data patterns, particularly over the weekend that have accelerated the move to the downside just ahead of the RBA’s policymeeting on Tuesday.
Markets anticipate a more than 80% chance that the RBA will raise rates, despite already having the tightest policy among major central banks. Economists justify this projection based on persistently high inflation forcing the move, but markets are starting have some doubts. A pullback in the currency ahead of the policy meeting gives more room for a move to the upside if the RBA does go through with the expected rate hike. On the other hand, markets might have good reason to reprice to the downside, as the RBA could take the more surprising option and decide to hold.
What’s Driving the Latest Drop in the AUDUSD?
Traders are a more cautious about the Aussie following the release of official China PMI’s over the weekend. As a large exporter to the Asian Giant, Australia is seen as a liquid proxy for what’s going on in China. The official NBS manufacturing PMI unexpectedly fell into contraction a notable to margin to 49.3 from 50.1 prior. This was an unexpected development, signalling large firms in China are under more pressure than the market expected.
The private RatingDog (ex-Caixin) measure fell from a five-month high, but was still above expectations and well into expansion at 52.0. However, this did not reassure investors, because the private measure covers a larger range of smaller, export-oriented firms. The tech sector has seen surging demand, propping up exports. But, after disappointing AI results this earnings season, investors are having less confidence that the upside will remain. Further, these firms don’t need as much basic raw materials like steel and goal, Australia’s main exports, which go to bigger, state-owned firms tracked more closely by the NBS.
Markets Are Shifting Their RBA Outlook
The data release did not initially dent market pricing for Tuesday’s rate decision. But, an interesting phenomenon has been developing in Australian bond markets. Futures have actually increased the odds of near-term hikes, pricing in just over 50bps of easing by the end of the year. At the same time, the odds of a hike next year have fallen dramatically. In fact, markets are seeing a rate cut around the middle of 2027 as increasingly likely.
This complicates how the market might react to the upcoming rate decision. If the RBA delivers as expected, the markets might increase the odds of a cut in the medium-to-long-term, weighing on the currency. The end result could be a bump higher that is faded fairly quickly, or a counterintuitive move lower even as the central bank gets more hawkish.
What the Market Is Looking For
The near-term hawkishness is based on expectations that the RBA will keep fighting higher-than-expected inflation. If the policy statement and Governor Michelle Bullock stick to the expressing concern about “second round” inflation effects, the market could up the odds of a hike early next year and support the AUDUSD.
On the other hand, if the RBA just omits mention of “second round” effects or signals it expects inflation will come down next year, then the market to could take it as “dovish hike”. Combined with the negative data from China over the weekend, this could cause the AUDUSD to decline further.
