FX Viewpoint: AUD: The RBA resumes rate hikes in November
13 Nov 2023
As widely expected, the RBA raised its policy rate to a 12-year high in November, ending four months of steady policy
Our economists see the RBA as having now reached its peak rate and expect the first rate cut to come in 3Q24
AUD-USD is likely to face downward pressure in the months ahead, in our view
On 7 November, the Reserve Bank of Australia (RBA) raised its cash rate by 25bp to a 12-year high of 4.35%, ending a four-month pause, as widely expected.
The proximate trigger for the hike was the upside surprise to Australia’s 3Q CPI inflation figures (Chart 1). According to the statement, recent data suggested the risk of inflation remaining higher for longer has increased. The RBA's inflation forecast was revised upwards to 3.5% by the end of 2024 (up from 3.3% previously); while inflation is expected to fall back to 2.9%, i.e., the top of the 2-3% target band by end-2025 (up from its previous forecast of 2.8%).
However, hawkish forecast revisions were accompanied by more dovish forward guidance, moving from a clear tightening bias towards a more data-dependent stance. Our economists expect the RBA to hold rates steady over the coming meetings, until the first rate cut comes in 3Q24, and also see a risk that the policy rate may remain higher for longer.
The announcement sustained the AUD’s 10% decline against the USD since February 2023 (Bloomberg, 9 November 2023). Concerns of the RBA being “behind the curve”, with deteriorating real yields (i.e., nominal yields adjusted for the effects of inflation), likely fuelled the negative market reaction. We still maintain our threefactor medium-term bearish view for the AUD. First, slowing US growth would hardly be good news for the AUD, as it would likely combine with weakness in growth elsewhere to heighten global growth concerns and weigh on risk sentiment.Second, AUD-USD has not benefited much from favourable moves in relative rates recently, but has suffered from unfavourable moves (Chart 2). This asymmetry should last, if markets focus on more dominant negative themes. Third, our base case remains that China's growth outlook will not be a supportive factor for the currency anytime soon.
After the USD rally seen since mid-July, further near-term gains are likely to be...[5 Oct]
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