The Reserve Bank of Australia (RBA) kicked off the July round of major central bank announcements with another pause in its monetary policy tightening. The guidance from the RBA suggests that there might yet be more tightening in the pipeline with data-dependent decisions to come. This topsy-turvy approach leaves AUD traders with a sense of uncertainty and positions on AUD crosses will likely be driven by events away from Australian shores.
- A hawkish hold from the RBA
- The chances of another hike in September remain high
- The market reaction on AUD crosses suggests ranges are developing
A hawkish hold from the RBA
The Reserve Bank of Australia opted to keep its Cash Rate Target steady at 4.10% today. It has increased the rate by 400 basis points in this tightening cycle and has already paused once in rates in April. It is tempting to believe that this will now be the peak, but there is an expectation that there is still likely to be at least one more hike on the cards.
The reason for the hold at this meeting was data-driven. After resuming tightening for the past two meetings, a benign inflation print in May followed what was an already finely balanced decision to hike last month. Q1 GDP had already come in a little shy but the big drop in month-on-month inflation was a clincher, with CPI falling sharply from 6.8% to 5.6% and much lower than the expected 6.1%. The pause was broadly expected by analysts and OIS market pricing.
Despite this, the takeaway from this meeting is that this is a “hawkish hold”. With Q1 CPI still at 7.0%, inflation is much higher than the target rate of 2% to 3%. The RBA is still very wary of the impact that high levels of inflation can have. Higher wage growth in a tight labour market (unemployment recently dipped back down again to 3.6%, close to a 50-year low) remains a concern. With retail sales much better than expected in May too, the RBA will be looking at the wage pressures that are brewing.
The RBA is very much a data-dependent central bank now. Inflation may be dipping at the moment but will jump again as there is a 20% YoY spike in electricity tariffs to factor in for July. By the time the RBA comes into the September meeting, the expected jump in CPI inflation will likely require another hike to the interest rate.
So despite the RBA pausing rates for a second time, this does not look like it is the end of the tightening. The statement is very much balanced towards the need for more hikes and it looks as though the run of stop/start hikes will continue.
AUD may build support again
The market reaction has been interesting this morning. The knee-jerk move was lower on AUD. However, as moves have developed during the late Asian session and into European trading, the AUD has been increasingly supported (however, we must also be aware of the US public holiday today so we may not get a decisive reaction until tomorrow).
The market reaction to a hold on rates might seem a little counter-intuitive, but the prospect of another hike is seemingly now starting to support the AUD again.
The AUD went on a terrible run during the last two weeks of June, but it is now starting to pick up again. Traders will certainly now be watching the outlook for wage growth in Australia, given the focus that the RBA gives it in the statement.
AUD showing signs of stability on its crosses
I have seen the AUD picking up versus the USD in recent sessions. However, notably, there are signs of stability on EUR/AUD and maybe even GBP/AUD too.
The technical analysis of EUR/AUD shows that a sharp rally (i.e. EUR positive/AUD negative) which broke the downtrend channel has now tailed off. The pair is turning into more of a range play, with resistance forming between 1.6515/1.6553. This is reflected in the Relative Strength Index momentum which is now oscillating between 30/70. This will make the outlook more uncertain, in the coming weeks, but AUD weakness has at least been curtailed for the time being.
This stability may even be enough to put the brakes on a GBP/AUD rally too. Sterling has been a strong performing currency on major forex, especially in the past couple of weeks against the ailing AUD. However, the GBP strength has just begun to ease back just as the AUD is showing signs of support. This leaves GBP/AUD potentially ready to develop a near to medium-term trading range.
Support around 1.8500 is firm, but the resistance at 1.9182/1.9237 is also growing. There is more of a positive bias to the RSI momentum on this pair, which would suggest that a strategy of buying into weakness might be favoured. However, a pullback to form support into the belly of the range, around 1.8750/1.8850 could be seen near-term.
