- The RBA increased Australia’s cash rate to 4.35% in November, as expected
- Markets have interpreted it a dovish hike due to a change to the final paragraph of the statement
- History suggests it’s rarely one-and-done when the RBA hikes rates
Traders believe the RBA is one-and done when it comes to the restart of its tightening cycle, jumping to the conclusion the 25 basis point rate hike to 4.35% in November will likely be the last. But for anyone who has been following the RBA over numerous cycles would know, when it lifts interest rates it’s rarely in isolation.
The initial reaction in AUD/USD and the ASX 200 was that the RBA delivered a “dovish” hike, sending the currency sharply lower and equities off their lows.
Was it really a RBA dovish hike?
After the initial decision was digested by traders, the next area of focus was on what the Board said in the key final paragraph of the statement.
Here’s the first sentence they encountered: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”
A month earlier, the statement noted “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”
The replacement of the word “some” with “whether” has been interpreted by traders as dovish, providing optionality on how the bank may proceed. But you could also argue some provides similar flexibility, allowing to either hike or hold depending on the incoming data.
Adding to the need for caution, it’s not unusual for the RBA to be non-committal on future moves after it has just delivered one. Former Governor Glenn Stevens often used to say nothing after he adjusted the cash rate. As this is Michele Bullock’s first hike as governor, we have no certainty as to what her approach will be?
Statement full of reasons to hike
Were it not for the change of word to “whether”, much of the remaining statement was hawkish for those who read it.
“The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly,” it read, adding that “while the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected.”
On the domestic economy, it said the “risk of inflation remaining higher for longer has increased”. Economic growth has been “stronger than expected over the first half of the year” while the labour market “remained tight”. It added “housing prices are continuing to rise across the country”.
Despite acknowledging that there are “still significant uncertainties around the outlook” in both directions, inflation remains the RBA’s top priority. Given the tone of the statement outside the final paragraph, it still comes across as there’s likely more work to do in the absence of a sharp slowdown internationally.
AUD/USD moves back from seller at .6500
AUD/USD added to earlier losses following the RBA decision, moving further away from resistance located above .6500. Minor support around .6450 and the 50-day MA are the next downside levels to watch. Movements from now on are likely to be driven by global factors, along with any major forecast changes from leading Australian economists.
ASX 200 eyes 7000
For the ASX 200, it’s bounced back towards resistance located around 7000, forming a bullish hammer candle in the process. While the risk is the dovish interpretation will be proven wrong, global factors will likely determine whether this latest attempt will succeed or fail. On the topside, 7080 and 7145 are the levels to keep an eye on. Below, 6885 is the first support of note.
-- Written by David Scutt