Australian Dollar Spikes After RBA Hikes. Will AUD/USD Find Higher Ground?

By Investor Empires On May 2, 2023

Australian Dollar, AUD/USD, RBA, CPI, Fed, European Central Bank, Bank of England – Talking Points

the Australian dollars Enhanced by RBA rate to rise
A 25 basis point hike makes the liquidity rate of 3.85% the highest since 2012
CPI is Enemy No. 1. If the RBA stays hawkish, they will be Australian dollar / US dollar throat?

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The Australian dollar rose over 67 cents after the Reserve Bank of Australia tightened monetary policy after a pause last month. 25 basis points raised the cash rate to 3.85%.

In the accompanying statement on monetary policy, the bank said, “Further tightening of monetary policy may be required to ensure that inflation returns to target within a reasonable time frame, but that will depend on how the economy and inflation develop.”

They highlight the tight labor market and that wages are beginning to recover.

Australian retail and trade sales data will be released this week, followed by the Building Approvals numbers next week. The Citibank Economic Surprise Index (ESI) in the chart below is tilting towards a potential win for AUD fundamental data.

Data: Bloomberg

Prior to the meeting, interest rate markets were pricing in a fifty-fifty basis point chance of a 25 basis point hike later this year. Now that the market has arrived, it is resetting and digesting the tone of the statement. The reaction in AUD/USD was even sharper.

Inflation figures released last week appeared to have stoked some fire for concern with core CPI rising 7.0% beating expectations of 6.9% year-on-year through end-March, vs. 7.8% previously.

The RBA’s preferred measure of a contraction in CPI was 6.6% yoy for the same period instead of estimates of 6.7% and 6.9% previously.

The headline CPI number has been above the RBA’s inflation target of 2 – 3% since Q2 2021 while the cut-off average has been above target since Q1 2022.

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The RBA did not start raising the cash rate until May 2022. The shortcomings of the trimmed average measure may have been exposed by this episode.

This inflation-adjusted measure looks at the middle 70% of the core CPI basket. That is, it eliminates 15% of the basket, which has risen more and less.

This symmetrical approach means that if one side of the basket is experiencing sharper price changes, the other side of the basket that is being eliminated does not necessarily compensate for it equally.

When inflation pressures move significantly up or down, the value of evaluating underlying price changes using a basic method such as trimmed average may not be as useful as it was in the past.

What is clear from today’s decision is that the RBA is back in fighting inflation mode.

The Federal Reserve and the European Central Bank (ECB) will meet later this week while the Bank of England will meet next week. Interest rate markets priced in a 25 basis point hike by the three central banks.

Read the full RBA monetary policy statement here.