File image of Governor Bullock. Copyright: Pound Sterling Live.
The Australian dollar is softer after the Reserve Bank of Australia cast doubt on its willingness to raise interest rates further, lowering the odds of a November move to 60%.
The RBA raised interest rates 25 basis points, as expected, meaning that for currency markets it was always going to be about the guidance and the evolution of expectations for where the tightening cycle will end.
"Governor Bullock left the door open for more, noting that inflationary pressures would persist for longer than expected. But at the meeting itself both a hold and a hike were considered, a more dovish reveal," explains a reaction note from Lloyds Bank.
That two-way equivocation casts some doubt on whether further hikes will be forthcoming, which mechanically weighs on domestic bond yields and the currency.
The pound-to-Australian dollar exchange rate rises to 1.8932 on the day (0.33%), the Australian-U.S. dollar exchange rate falling 0.40% to 0.6999, the lowest since August 03.
"AUD is under some pressure after the RBA delivered its expected rate hike but revealed it had considered holding rates steady," says Francesco Pesole, FX Strategist at ING Bank.
The Australian dollar remains the best-yielding G10 currency out there: that means foreign investor funds are drawn to Australia where interest earnings are elevated compared to elsewhere in the developed market bond space.
However, if the central bank stops raising rates, that yield advantage starts to diminish, and the AUD's price action reflects that shift in dynamics via a weaker exchange rate.
Governor Bullock said policymakers considered holding rates today, given risks to the housing market and a potentially slower global economy due to the Middle East conflict.
"We'd think she could have been a bit more forceful in her language on inflation (difficult situation line is not new, or unexpected), but clearly the board is pragmatic with regards the need for further tightening, wary of lagged effects and the risk of delivering too much, with an eye on the housing market and overall growth," says a response note from Lloyds Bank.
Money market pricing - gleaned from Overnight Index Swaps - shows investors now see 16bp worth of hikes coming from the RBA by year-end, that's close to a 60/40 call that that Bank will hike again.
"The implied probability of a back-to-back hike in November at around 60% appears a bit too high," says Pesole.
If pricing reduces further, the Aussie dollar can extend losses, helping the GBP/AUD up to the 100-day moving average at 1.90.
"Current pricing still leaves AUD as the DM high yielder, but the tone feels mildly negative for the currency given what is currently priced by the interest rate market," says Lloyds.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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