- Australia’s interest rates are likely to remain unchanged at 4.35% in December after the November rate hike.
- Reserve Bank of Australia Governor Michelle Bullock could leave the door ajar for further tightening.
- Any surprises in the wording of the Reserve Bank of Australia’s (RBA) policy statement will likely shake up the Australian dollar.
The Reserve Bank of Australia (RBA) will leave the Official Cash Rate (OCR) unchanged at a 12-year high of 4.35% after its December monetary policy meeting on Tuesday, pausing its tightening cycle again. The decision will be announced at 3:30pm Japan time.
With markets widely expecting the Reserve Bank of Australia (RBA) to keep interest rates on hold, all eyes will be on Governor Michelle Bullock’s forward guidance in her policy statement to stimulate a new direction for the Australian dollar.
Reserve Bank of Australia takes a wait-and-see approach as inflation recovery slows
The Reserve Bank of Australia raised its benchmark interest rate by 25 basis points (bps) from 4.10% to 4.35% in November, after keeping interest rates unchanged for four consecutive meetings as inflationary pressures reignited.
Inflation and retail spending in Australia have cooled since then, solidifying the central bank’s case for keeping the cash rate unchanged this week. Data released by the Australian Bureau of Statistics (ABS) on Wednesday showed the monthly consumer price index (CPI) rose at an annualized pace of 4.9% in October, slowing from the previous 5.6% rise and accelerating by an expected 5.2%. below. The trimmed average, a measure of core inflation closely monitored by the RBA, rose at an annual rate of 5.3% in October, slowing from 5.4% the previous month.
Services inflation, as measured by the wage-price index, rose by 4.0% annually, the fastest pace since early 2009. The rise in wage growth was largely priced in after the RBA hiked interest rates last month. Moreover, the market believes that the spike in wage inflation is caused by temporary factors and is unlikely to recur.
Meanwhile, Australian retail sales fell 0.2% on a monthly basis in October, reversing September’s 0.9% rise, but falling short of the expected 0.2% rise. The slowdown in economic data justifies an expected pause in the central bank’s rate hike cycle.
However, the RBA’s guidance in November was perceived as dovish, especially after Bullock said in a statement: “Is further monetary policy tightening necessary to ensure inflation?” In response, the main focus seems to be on the wording of the policy statement. Achieving goals within a reasonable time frame will depend on evolving data and risk assessments. ” The October policy statement noted that “further tightening of monetary policy may be necessary.”
The RBA is likely to maintain a cautious tone and await the fourth quarter inflation report in January before deciding its next interest rate move at its first meeting of 2024 in February. Speaking at a high-level meeting of the Hong Kong Monetary Authority and the Bank for International Settlements last Tuesday, RBA Governor Bullock said the central bank was ‘a bit cautious’ in using interest rates to control inflation without increasing unemployment. We need to become,” he said.
Ahead of the RBA’s decision, analysts at TD Securities (TDS) said: “Recent data is mixed, with the labor market buoyant, but CPI inflation has retreated significantly and retail sales are slowing. The RBA may therefore take a cautious approach and leave rates on hold until February to reassess once new staff forecasts and Q4 CPI are available. Little change to MPS. We don’t expect that, but it might not be surprising to see a more hawkish tone following Mr. Bullock’s recent comments.”
What impact will the RBA’s interest rate decisions have on AUD/USD?
The fate of the Australian dollar (AUD) depends on the RBA’s communication on the future direction of interest rates. If the Block President clearly states that further rate hikes remain on the table, AUD/USD is likely to extend its continued uptrend. Conversely, a dovish pause by the RBA could trigger a meaningful correction towards 0.6550 in the Australian currency pair.
FXStreet’s Asia Session Lead Analyst Dhwani Mehta points out the key technicals for trading AUD/USD on policy outcomes. “AUD/USD has seen its recent uptrend stall short of its four-month high at the 0.6700 level. However, the 14-day Relative Strength Index (RSI) remains in overbought territory. remains well above the midline, suggesting further upside potential for the Australian currency pair.
“Australian buyers need acceptance above the July 31 high of 0.6740 on a daily close basis to extract further upside towards the 0.6800 round number. The next upside barrier is seen around 0.6850. On the downside, Friday’s low at 0.6600 is expected to provide strong support, below which the 200-day simple moving average (SMA) at 0.6580 will be tested. The line of defense is seen as 0.6550.”
We expect the Australian dollar to strengthen steadily as 2024 progresses.
– Wells Fargo
Australian Dollar Frequently Asked Questions
One of the most important factors for the Australian dollar (AUD) is the interest rate level set by the Reserve Bank of Australia (RBA). Australia is a resource-rich country, so another important factor is the price of its largest export, iron ore, as well as Australia’s inflation, growth rate and trade, its largest trading partner. The health of China’s economy is also a factor. balance. Market sentiment is also a factor, with investors taking on riskier assets (risk-on) or seeking safer assets (risk-off), with risk-on being positive for the Australian dollar.
The Reserve Bank of Australia (RBA) influences the Australian dollar (AUD) by setting the level of interest rates at which Australian banks can lend to each other. This affects the level of interest rates throughout the economy. The RBA’s main goal is to maintain a stable inflation rate of 2-3% by adjusting interest rates up and down. The Australian dollar is supported by relatively high interest rates compared to other major central banks, and conversely by relatively low interest rates. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner, so the health of the Chinese economy has a significant impact on the value of the Australian dollar (AUD). When China’s economy does well, China buys more raw materials, goods and services from Australia, increasing demand for the Australian dollar and boosting its value. The opposite is true if China’s economy is not growing as fast as expected. Therefore, positive or negative surprises in China’s growth data often directly impact the Australian dollar and its pairs.
Iron ore is Australia’s largest export, accounting for $118 billion annually, according to 2021 data, with China the main destination. Therefore, iron ore prices could be a driver for the Australian dollar. Generally, when the price of iron ore rises, the Australian dollar also rises because aggregate demand for the currency increases. The opposite is true if the price of iron ore falls. Higher iron ore prices tend to increase the likelihood of Australia’s trade balance being positive, which is also positive for the Australian dollar.
The balance of trade is the difference between what a country earns from exports and what it pays for imports, and is another factor that can affect the value of the Australian dollar. If Australia produces a highly sought-after export, the country’s currency will be deducted from just the surplus demand generated from foreign buyers seeking to buy that export, compared to the amount spent on purchasing the import. value increases. Therefore, a positive net trade balance will cause the Australian dollar to appreciate, while a negative trade balance will have the opposite effect.