Australian Dollar Dips on RBA Decision, but Losses Looking Limited

Above: File image f Goovernor Philip Lowe. Image © Crawford Forum, Reproduced Under CC Licensing.

The Australian Dollar fell in the immediate aftermath of the Reserve Bank of Australia's (RBA) decision to raise interest rates by 50 basis points, but a subsequent recovery suggests the decision and broader message from Governor Philip low was as expected.

The RBA's overnight rate now stands at 1.35% following the hike and for markets there was little by way of new information in the all important accompanying statement.

"Unlike the previous two months, the statement didn’t offer fresh fuel for A$ bulls counting on the RBA playing catch-up with the Fed," says Sean Callow, Senior Currency Strategist with Westpac.

The Australian Dollar-U.S. Dollar exchange rate fell a third of a percent in the five minutes following the announcement before retracing much of the fall to quote at 0.6871 at the time of publication.

"The decision was near enough to expectations to have limited sustained impact on AUD/USD," says Callow.

There was a 0.29% rally in the Pound to Australian Dollar exchange rate in the five minute period following the RBA's announcement:

 "50bps hike from the RBA... buy the rumour, sell the fact reaction in AUD. Looks all straight down the middle & perhaps not as hawkish on the forward guidance as markets would've liked," says Viraj Patel, Macro Strategist at Vanda Research.

The GBP/AUD exchange rate went to a high of 1.7660 before fading to 1.76430, where we find it now: high-street banks are delivering an approximate rate of 1.7137 for payments and independent providers are quoting at around 1.7578.

Westpac thinks the 0.6760/65 area in AUD/USD should be re-tested in coming days, with risks to 0.6685 if the global mood deteriorates further.

If this is correct there would be an equivalent push higher in GBP/AUD back towards the top of the ongoing range at 1.79.

Above: GBP/AUD at daily intervals showing the top of the ongoing range at 1.79.

The RBA made minimal changes to the key final paragraph which confirms further hikes ahead with "size and timing" remaining dependent on its assessment of inflation and the labour market.

The final paragraph on guidance is therefore largely unchanged on June's.

The RBA acknowledged risks remain to the outlook although much of this was global in nature.

Lowe acknowledged the unseasonal floods in New South Wales were likely to contribute upward pressure to domestic inflationary drivers.

"There is no further forward guidance on the pace of hikes nor likely peak and we continue to think that the global central banking bank drop, risks to inflation and still low level of cash argues for a move to neutral sooner rather than later," says Su-Lin Ong, head of Australian economics at RBC Capital Markets.

RBC Capital expects another 50 basis point hike in August following the second quarter CPI release on July 27 as the RBA moves towards delivering a 2.85% terminal rate later this year.

Economists at ANZ say they now see the RBA delivering another 50bp hike in August, an upgrade to their previous forecast for a 25bp move.

25bp hikes are meanwhile expected in September and November, to end the year at 2.35%, which is an unchanged year-end rate forecast for ANZ suggesting they merely see more of a 'front loaded' approach from the RBA.

Further rate hikes are anticipated in 2023-24 to take the RBA's cash rate above 3%.

"Job vacancies and ANZ Job Ads indicate the labour market is still tightening, increasing the urgency of the RBA’s need to get to at least neutral," says ANZ economist David Plank.

And what does the RBA policy outlook hold for the Australian Dollar?

"As the rate decision did not entail any surprises and the RBA did not surprise on the hawkish side AUD was unable to benefit this morning. It can be expected that also over the coming months the RBA will tighten its monetary policy in a controlled manner, not too much and not too little. However, that is unlikely to be sufficient for AUD and AUD is unlikely to receive support on this front," says You-Na Park-Heger, FX and EM Analyst at Commerzbank.

She adds the Australian Dollar is instead likely to be largely driven by external factors such as the prospects for economic developments in China and market sentiment.

"As recession fears are likely to continue for some time, AUD is likely to remain under pressure for now," says Park-Heger.