RBA Preview and what next for the AUDUSD?

At its monthly meeting next Tuesday, the Reserve Bank Board is widely expected to raise the cash rate from its current setting of 0.35%.

The main uncertainty is whether the RBA lift the cash rate by 25bp to 0.60% as it did in May. Or a 40bp increase to 0.75%, back to where the cash rate was pre the Covid-19 pandemic and to realign with the 25bp increments it has historically moved the cash rate by.

The cause of the uncertainty is primarily the result of the RBA catching most pundits on the wrong foot at the May Board meeting. Before the May meeting, a Bloomberg survey of economists showed five respondents were expecting no hike. Twenty expected a 15bps hike, and five expected a 40bps hike to 50bps. No one was calling for a 25bp hike.

This time around, two-thirds are calling for a 25bp hike, one (Goldman) is calling for a 50bp hike, and the remaining respondents are forecasting a 40bp increase. Elsewhere the interest rate market is priced for 36bps of rate hikes next week and for the cash rate to reach 2.50% by year-end.

At the May RBA meeting, Governor Lowe referred to the 25bp hike as a return to 'business as usual', which has raised the expectation for the RBA to move by 25bp intervals. However, the minutes from the May meeting showed the board discussed three options, including a 40bp hike.

Economic data since the May meeting has been mixed. While this week's Q1 2022 GDP was higher than expected at 0.8% QoQ vs 0.7% YoY expected, it was lower than the RBA's forecast. Wages data was also softer than forecast, coming in at 2.4% YoY vs 2.5% YoY expected.

Offsetting this a hawkish lead from other developed market central banks (the global central banker community talk amongst themselves) and red hot Q1 inflation data, which pushed core inflation 70bp above the RBA's 2-3% target band.

"The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead."

Considering all of the above, a 40bp rate hike is most likely next Tuesday that will take the cash rate to 0.75%. The RBA are then expected to deliver another 75bp of hikes (25bp each in July, August and November), taking the cash rate to 1.5% by year-end..

What does it mean for the AUDUSD?

Overnight the AUDUSD registered its first daily close above the 200-day moving average (currently at .7256) in six weeks. The latest leg of its rally supported by firmer risk sentiment and stronger commodity and energy prices.

However, with Fed speak remaining decidedly hawkish and the June FOMC meeting just two weeks away and expected to deliver another 50bp rate hike, I would be a reluctant buyer of the AUDUSD at current levels. Instead, the preference is to buy dips back towards support .7050ish.

Alternatively, I would be open to more upside if the AUDUSD were to see a sustained break (four or five days) above the 200 day moving average at .7256

 

Source Tradingview. The figures stated are as of May 3rd of June  2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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