RBA finally moving toward rate hikes
The Reserve Bank of Australia (RBA) did not join the increasing number of major central banks to increase interest rates. In today’s meeting, the RBA held its Cash Rate Target at +0.10%. This was entirely expected.
However, the key takeaway from this meeting is what was not there. In a move that has slightly caught market participants off guard, the RBA removed a key line from the statement that talked about the board being “prepared to be patient” as it monitors various factors affecting inflation.
What does this mean?
The RBA is no longer “patient” with regard to reacting to rising inflation. In terms of central bank speak, this means that a rate hike is likely to be just around the corner.
Inflation has recently risen to 3.5%, above the 2% to 3% target range, whilst unemployment has fallen to 4.0%. Wage costs are also rising, with wages now growing at 2.3% in Q4 2021. The final paragraph in the RBA statement speaks of inflation expected to increase further, whilst also looking at labour costs. The next quarterly release of wage growth is on the 19th May, which is after the May RBA meeting.
Subsequently, markets are looking at the wage growth in May to trigger the RBA into hiking rates. A June rate hike is very much on the table now.
Market Reaction
Australian bond yields have been shooting higher since the beginning of 2022. A further move higher today has seen that rate of the 10-year yield moving ever closer to 3%. This is helping to continue the AUD outperformance amongst major forex.
The Australian dollar (AUD) has shot higher making a key breakout versus the US dollar. AUD/USD has moved decisively through 0.7555. The weekly chart shows how important this breakout is, with 0.7550 being a long term pivot resistance. A breakout opens the way towards 0.7770/0.7890 in due course.
On a nearer-term basis, the breakout needs to be consolidated. Old resistance becomes new support. We would now see the 100 pip band between 0.7455/0.7555 as key breakout support for opportunities on a pullback.
We would also see good opportunities to buy the AUD crossed with both the EUR and the JPY. We believe that any unwinding moves to the recent AUD strength will be a chance to buy. On EUR/AUD, the breakdown below 1.4520 key support has opened a retest of the long term support at 1.3710.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
