RBA’s 0.5% Hike Sends AUD Diving

RBA

The Australian Dollar dives after the RBA appeared to step back from aggressive tightening. The bank lifted the cash rate target by 50 basis points (bps) to 1.85% from 1.35%.

This is the passage that seems to have led the market to believe that the RBA may not be as hawkish as previously thought.

“The Board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.”

CPI, a key data provider, won’t be forthcoming until late October. This means that the next two meetings could see the RBA step back from 50 bps hikes and potentially not change them at one or both meetings.

Australian 2Q CPI did not come in as hot as anticipated, allowing some breathing space for the RBA to avoid an overtly hawkish stance.

The Federal Reserve lifted rates by 75 bp last week to deal with 9.1% CPI, while the Bank of Canada hiked by 100 bp last month to combat 8.1%CPI.

Earlier in the day, Australian building approvals came in better than expected at -0.7% month-on-month for June against -5.0% anticipated and the previous month’s red-hot 9.9%.

Previous economic data has mostly been strong, with the June unemployment rate coming in at multi-generational lows of 3.5% against the 3.8% forecast and 3.9% previously.

Australia’s trade balance for June will be released on Thursday, and It is still unknown whether May’s blistering AUD 15.7 billion surpluses can be backed up with another solid number.

It seems the economic data needs to be very strong for the RBA to hike by more than 25 bps at either of their September or October meetings. AUD/USD went lower and may be pressured continuously if the situation stays the same.

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