AUD_3_M AUD_3_M AUD_3_M

RBA under-delivers: AUD momentum could turn bearish, particularly on the crosses

Forex 5 minutes to read
Charu Chanana 400x400
Charu Chanana

Head of FX Strategy

Summary:  The Reserve Bank of Australia’s pause came with a neutral-to-dovish tilt in commentary amid lack of data, leaving market unimpressed as a hawkish hold was priced in. This opens the doors for dovish repricing of the RBA curve for 2024, where only one rate cut is priced in vs. Fed’s five. AUDUSD could be range-bound, but AUD sees room for decline on the crosses against NZD, JPY and potentially CAD and GBP.


The Reserve Bank of Australia (RBA) decided to keep rates unchanged at 4.35% today, but markets expected a hawkish hold and were unimpressed by the commentary. The RBA noted a downtrend in monthly inflation numbers, and seemed concerned about the economic momentum as lags in transmission of tightening were also cited. The central bank adopted a data-dependent approach from here, saying that “whether further tightening is required will depend on incoming data”.

5_FX_AU CPI

Activity indicators have been cooling, and may justify little need for further tightening. November manufacturing PMI dipped further into contractionary territory at 47.7, coming in at the lowest since the start of the series in 2021, while services PMI released today cooled further to 46 from 47.9 in October. While jobs data remains supported by immigration, the skew has shifted towards more part-time jobs that still suggests a less robust labor market. These indicators, together with the RBA commentary seen today, is signalling that the RBA rate hike cycle has ended. The RBA stayed away from highlighting any risks that inflation could continue to remain above target, or reiterate its low tolerance to inflation overshoot.

Next focus will be on services inflation in the quarterly print due on 31 January before the next meeting in February.

What does it mean for RBA rate cuts in 2024 and path for AUD?

Ahead of the RBA decision, markets saw a 30% chance of another RBA rate hike and less than one full rate cut in 2024. Dovish re-pricing has started post the RBA announcements, and rate hike bets have been erased while one full rate cut is now priced in for next year. There seems to be scope for more, given the Fed is expected to cut rates more than five times in 2024. That could mean more pressure for the AUD. Potential USD rebound following heavy dovish Fed re-pricing last week could also mean AUD could remain under pressure.

AUDUSD is currently testing the 200DMA at 0.6579, and break below could open doors for a move towards the 21DMA at 0.6529 or the 0.65 handle. However, AUD decline could be limited as US dollar remains in a broad downtrend amid soft-landing hopes. Unless US economic data aggravates recession concerns and brings a safety bid for the dollar, AUD downside could remain limited. Focus today will be on US JOLTS job opening data and ISM services. Any upside surprises could mean more Fed rate cut expectations could unwind, boosting the USD and pushing AUD lower to test the 0.65 handle. But downside surprises could prompt range trading for now and focus will shift to NFP data due on Friday.

5_FX_AUD
Source: Bloomberg

Meanwhile, AUD decline could be more prominent on the AUDNZD cross, with the RBNZ’s hawkish hold last week and sterner language on inflation being in a clear divergence to the RBA language today. AUDCAD cross could also be under pressure if Bank of Canada goes for a hawkish hold tomorrow after jobs data surprised to the upside recently.

5_FX_AU us NZ yields

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.