Reserve Bank of Australia dovish hike weighs on AUD

RBA dovish hike weighs AUD down

• Markets react to the prospect of “further tightening”: The RBA could be close to the end of its tightening cycle. 
• AUD underperforms: The Aussie is the weakest currency on major forex, although the USD is also slipping.
• Elsewhere equities look cautious: European indices are all but flat, with earlier gains on US futures tailing off.
• Precious metals are steady, oil higher: On commodities, we see consolidation on gold and silver, whilst the rally on oil is now testing important resistance

Another RBA hike, but the terminal rate could be close

The Reserve Bank of Australia (RBA) has hiked its cash rate by another 25 basis points to 3.60%. 

This is the highest interest rate for more than ten years. The cash rate was last at 3.0% in 2013.

Quarterly inflation is running at 7.6%, more than double the central bank rate. However, the RBA is seeing signs in the economy of slowing consumer spending and muted wage growth.

Although wages picked up to 3.3% in Q4, this was below the 3.5% forecasts, dampening the prospect of a wage-price inflationary spiral.

Here is an exert from the RBA statement today:

Whilst there is still a risk of wages feeding into inflation, the RBA was minded to change the wording in its forward guidance.

Previously, it talked about further “increases” in interest rates (i.e. plural). Now, the wording has been changed to “further tightening”. 

This is pointing to the prospect that the RBA could potentially stop hiking soon. Maybe even just one more.… 

This seems to be what markets are reacting to.

The RBA is lagging behind other central banks

We see in the graphic below (by Reuters) that not only has the RBA not hiked as much as other major central banks (such as the Fed and RBNZ), if it is also preparing to end rate hikes in the April meeting, this would leave it significantly lagging.

The AUD continues to underperform

A chart looking at the performance of major currencies versus the USD over the past month shows the AUD at the bottom of the pile.

The AUD was hit yesterday by the underwhelming Chinese GDP growth target for 2023. This weakness in the Aussie has been extended by today’s dovish hike by the RBA.

AUD/USD breaking down

As the AUD underperforms, it is under selling pressure on major crosses.

AUD/USD

The downtrend on AUD/USD continues and the price has broken below the near-term support of last week’s low at 0.6695.

• This has opened a test of the big November/December lows between 0.6585/0.6685.
• Momentum is correctively configured with the RSI in the mid-30s with downside potential.

Resistance at 0.6783 is increasingly important as a lower high now.

GBP/AUD

The major cross has been building higher for the past few weeks.

One attempt at clearing the January high of 1.7960 could not be sustained last week, but today we are seeing another attempt.

• A close above 1.8030 would be a bullish confirmation of a breakout for a test of the medium-term range resistance at 1.8275.
• Momentum is strong with the RSI in the mid-60s but with further upside potential.

The higher low at 1.7713 is an important support now as the technical configuration appears to suggest that weakness is a chance to buy for a test of the range highs.

Support and resistance levels for Forex, Commodities, and Futures/Indices

Data: MT5/IXOne

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