FX Update: RBA set to surprise with larger hike tonight?
Head of FX Strategy
Summary: There are arguments for and against the RBA hiking more than the 50 basis points the vast majority of observers are looking for at tonight’s meeting, but a much firmer Aussie and extremely easy financial conditions certainly make it far easier for the RBA to make like the Fed and hike 75 basis points. Elsewhere, the US dollar has weakened further after Friday’s whiplash-inducing session as lower US treasury yields and easing financial conditions drive the US dollar lower ahead of important US data releases and a few Fed speakers in coming days.
FX Trading focus: RBA could be set for a 75 basis point move
The overwhelming majority of observers are looking for a 50 basis point rate hike from the RBA at tonight’s meeting, and that may very well be what we get, but there are a number of reasons that the RBA might take the chance to “go large” tonight with a 75 basis point move (or even a cheeky 65 basis point move to get the rate back on a . Recent speeches by RBA Governor Philip Lowe and by RBA Deputy Governor Michele Bullock offer plenty of support for getting more quickly to the “neutral rate” a la the Powell Fed’s 2.50%, although the language is quite frank on how difficult it is to determine what the neutral rate really is. Bullock’s speech on how well Australia households are positioned for rate increases included: "On balance, though, I would conclude that as a whole households are in a fairly good position. The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent and have built in larger buffers for interest rate increases. Much of the debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required. Furthermore, those on very low fixed-rate loans have some time to prepare themselves for higher interest rates."
But rather than slicing and dicing the RBA comments, I would suggest the following factors support the RBA moving more aggressively than most believe they will tonight:
- The primary reason the RBA can go more quickly here than it might have with a different backdropis that financial conditions are extremely easy, with global- and Australian equity markets ripping higher in recent weeks.
- Key commodity prices have stabilized or are even rallying strongly, in the case of iron ore and especially coking coal.
- The July Melbourne Institute Experimental Inflation measure out overnight jumped 1.2% month-on-month and to 5.4% year-on-year (versus 4.7% in June)
- The unemployment rate is at historic lows of 3.5% - Q1 wage data was muted, but with such a tight jobs market and the current inflation levels, wage pressures should intensify rapidly in Q2 (out later this month).
- Finally, and perhaps most importantly, the US Fed has already set a precedent with not only one, but two 75 basis point hikes with the markets easily absorbing these after adjusting to the new before hand (equity markets bottomed and rates topped right around the time frame when the mid-June FOMC meeting delivered the expected “super-size” hike).
The chief factor holding back the potential for a larger RBA move is the monthly meeting frequency of the RBA, which is 50% more frequent than most other G10 central banks (i.e., they can move 150 basis points by 50 basis points at three consecutive meetings roughly as quickly on the calendar as the Fed can move 150 bps by hiking 75 bps twice as it did recently).
The RBA is set to meet tonight and could move the needle with a larger than expected hike, given the factors I note above. This could drive AUDUSD and the AUD broadly higher. The next significant area of resistance after the pair takes out this pivotal 0.7000 area would be up into the 200-day moving average near 0.7175 and then the major pivot high just ahead of 0.7300. I’m not yet looking for a change of trend in the longer term as I want to see how financial conditions fare once the Fed is cranking up into its full pace of Q2. An in-line 50 bps from the RBA is neutral to the expectations, and we have all manner of exotic scenarios like a 50 bps hike with particularly hawkish guidance or a 75 basis point move with or without more hawkish guidance, and even a 65-bps in-betweener (to take the policy rate to a round 2.00%) etc.
Elsewhere, the market made a mockery of my Friday update, in which I claimed that the USD is a “tough one to keep down” as the steep USD selling action on the back of the weak PCE inflation data point Friday quickly reversed and the greenback has traded to new lows for the local cycle today. The chief focus is on easing financial conditions as US yields at the longer end of the curve have slipped to multi-month lows below the key 2.70% area in the US 10-year yield benchmark, for example. If the key US data this week (especially ISM Services on Wednesday and the earnings data for July in Friday’s job report) fail to support the market’s assumption that the Fed is shaping up to ease the pace of tightening at the September meeting, the USD could yet pivot back higher. A few Fed voters are also out speaking in the coming couple of days, possibly with pointed messages if there is a strong disapproval from the Fed of the market’s strongly easing of financial conditions and the pricing of Fed rate cuts next year. The Cleveland Fed’s Mester will speak tomorrow, as will non-voter Evans of the Chicago Fed earlier in the day. Very late tomorrow we have noted hawk Bullard of the St. Louis Fed speaking. Mester will speak again on Thursday.
Table: FX Board of G10 and CNH trend evolution and strength.
Interesting to see CNH competing with EUR for weakest of G10, with the CNH more clearly following the USD in momentum terms. Rising to the top is the JPY on falling US long yields, but we wonder how far this can continue.
Table: FX Board Trend Scoreboard for individual pairs.
Can it be – the euro is flipping positive against…CNH, and nearly set to do so against the US dollar if EURUSD follows through resistance.
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