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The Australian dollar is supported by growing expectations that the Reserve Bank of Australia will raise interest rates next week, after official data showed inflation running ahead of the central bank's forecasts.
The Australian dollar rises against the pound and the New Zealand dollar on Wednesday as investment bank economists firm up calls for a November rate hike at the Reserve Bank of Australia (RBA) following the release of third-quarter inflation figures.
A hike would take the RBA's cash rate to 4.85% and widen the interest rate premium Australia offers over New Zealand, where the central bank opted to hold rates on Wednesday.
Headline consumer prices rose 1.3% in the three months to September, above the 1.2% consensus, while the trimmed mean measure of underlying inflation favoured by the RBA rose 1.0%, lifting the annual rate to 3.7%, according to the Australian Bureau of Statistics.
The quarterly trimmed mean overshot the 0.8% pencilled in by the RBA in its August forecasts, confirming Deputy Governor Andrew Hauser's warning last week that inflation would run ahead of the central bank's projections.
Annual headline inflation rose to 4.3% in September from 4.0% in August, with automotive fuel and holiday travel the biggest contributors.
Underlying price pressures are accelerating, with the six-month annualised pace of the monthly trimmed mean now at 4.0%, "the fastest in the short history of this series," say Justin Smirk and Neha Sharma, economists at Westpac.
Australian trimmed mean inflation, quarterly and annual % change. Source: ABS, Macrobond, Westpac Economics.
RBA Governor Michele Bullock said on Wednesday that "some of the international and domestic upside risks to inflation have materialised or are materialising," while Hauser told the Senate Economics Legislation Committee inflation is "too high."
Money markets now price a better than 80% chance the RBA raises rates on 3 November, up from around 10% in mid-October when a weak jobs report appeared to take a hike off the table.
Australian monthly CPI indicators, annual % change. Source: ABS, Macrobond, Westpac Economics.
The Australian to US dollar exchange rate rose to a five-week high near 0.7055 after the release before the US dollar firmed ahead of tonight's Federal Reserve decision.
The Pound to Australian Dollar exchange rate falls 0.22% to 1.8896.
Investment Bank Economists Expect a November RBA Hike
ANZ economists expect the RBA to revise its inflation forecasts higher in November's Statement on Monetary Policy, "today's inflation data cements the case for the RBA to hike rates 25bp in November," say Madeline Dunk and Adam Boyton in a reaction note.
The upside risks the RBA has been watching, around oil prices, the AI technology boom and domestic capacity constraints, are now materialising, according to ANZ.
Westpac has reaffirmed its call for a hike, "inflation is above target, and above what the RBA's August forecasts implied," says Luci Ellis, Chief Economist at Westpac. "The RBA is especially worried that above-target inflation will become embedded in people's expectations and pricing decisions."
Ellis expects a majority of the board to back a hike, though some members might dissent, and says the RBA is down-weighting the recent easing in the labour market.
Standard Chartered has dropped its call for an extended hold, "we now expect the Reserve Bank of Australia (RBA) to lift the cash rate to 4.85% in Q4, likely at the 3 November meeting," says Nicholas Chia, FX and Macro Strategist at Standard Chartered.
Chia detects a subtle shift in the RBA's reaction function, with the central bank "not too concerned about the steady increase in the unemployment rate" because other labour market indicators, such as job vacancies, have improved.
Commonwealth Bank of Australia now also expects a hike to 4.85%, as do UOB and Natixis.
The RBA Must Signal More Than One Hike to Extend Australian Dollar Gains
Should the RBA deliver a single hike and then pause, the Australian dollar's interest rate support would be capped, with Westpac's Ellis saying "further hikes beyond next week are not currently our base case."
The risk of a follow-up move, most likely in February, has increased, she adds.
Rates strategists at Natixis see limited scope for markets to price further RBA tightening, "front-end rate hike pricing looks fair for now," says Dayeon Hong, a strategist at Natixis.
Hong warns the cumulative impact of tightening will increasingly filter through to household consumption via a correcting housing market and variable-rate mortgages, shifting the RBA's focus toward the labour market by the second half of next year.
The US dollar presents a separate hurdle for the Australian to US dollar exchange rate tonight, with Danske Bank and Deutsche Bank expecting the Federal Reserve to hold rates before hiking in December and March.
"The US dollar should benefit from a Fed that is able to increase rates from a position of economic strength," says a daily note from KBC, the Belgian bank.
AUD/NZD Hits Highest Since 2012 as RBNZ Holds
The Reserve Bank of New Zealand left its cash rate at 2.75% on Wednesday in a 4-3 vote, wrong-footing money markets that had all but fully priced a hike.
The Australian to New Zealand dollar exchange rate rose from 1.2370 ahead of the decision to as high as 1.26, its highest level since December 2012.
"We see downside risk to the Kiwi currency from here… wait until London gets 'hold' of this news," says Jarrod Kerr, Chief Economist at Kiwibank.
"The NZD is unlikely to find support from rate differentials short-term," says Nicholas Chia at Standard Chartered, which now expects the RBNZ to hike in December and February.
The RBNZ retained its tightening bias, with all seven members agreeing further tightening is likely to be required, and ASB expects hikes in December, February and March.
GBP/AUD Breaks Below 1.90
GBP/AUD's fall takes it below the 1.90 level and the 21-day moving average at 1.9024, and through the 1.8891 low of 14 October, with the day's low at 1.8867.
GBP/AUD daily chart.
The break invalidates the constructive GBP/AUD setup highlighted last week.
Sterling faces its own test this afternoon when Chancellor John Healey presents the Autumn Budget, with KBC attributing recent pound strength to "investor confidence in PM Burnham's fiscal agenda."
A sustained hold below 1.90 into the RBA's 3 November decision leaves the May low area near 1.8540 as the next support for GBP/AUD.
