The RBA surprised the majority of observers with a smaller 25 basis point hike to take the policy rate to 2.60%. It’s a reminder of the vast shift relative to the old regime, in which one might have expected an RBA rate at least 100-200 bps higher than the Fed’s. The last time the Fed was hiking to north of 3.00% was in mid-2005, when the RBA cash target had already reached above 5%. The RBA chose to emphasize caution in its latest statement, citing the anticipation that unemployment will eventually rise beyond the near term strength in the labor market as the economy eventually weakens. Governor Lowe and company are clearly uneasy and uncertain on the effects of the sharp tightening in the bag on mortgage rates and future spending, and the statement continues to cite lower wage growth than elsewhere. In addition to AUDUSD note above, also interesting to watch the relative strength in AUDNZD over tonight’s RBNZ, as the sharply lower Australian yields (the year-forward RBA rate has been marked a remarkable 50 basis points lower by the market after this meeting). A surrender below the 1.1250-1.1300 zone would suggest a risk that the attempt to reprice the pair higher on the shift in relative current account dynamics I have cited before has failed for now.
Sterling rose further after Chancellor Kwarteng yesterday reversed his decision on the tax cut for the highest incomes in the UK. Interesting that this is was particularly item, while politically unpopular, was one of the least consequential in terms of the fiscal impact. For now, given the soaring risk sentiment backdrop, sterling short covering continues, but surely it’s not this easy? Technically, watching the major resistance zone at 1.1500 zone in GBPUSD and whether the bearish reversal back into the old range below 0.8700 in EURGBP sticks. This is still a government that is very much on the rocks. The latest controversy PM Truss is courting is claiming that she has yet to decide whether UK welfare distributions, outside of pensioners, should be raised with inflation, which has some Tory MP’s up in arms. Chancellor Kwarteng, feeling the rising pressure, will bring forward his fiscal statement to later this month from late November, around the time the Office of Budget Responsibility publishes its forecasts.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD rose so far in its up-trend before the recent setback, that there is some residual medium term up-trend strength left, though momentum has shifted markedly against the greenback. The opposite is the case for sterling, which has achieved a positive trend reading versus the G10 broadly due to weak G10 smalls of late (note GBPNZD, for example, at a high since late February. Elsewhere, strong risk sentiment, together with concerns of a struggling Swiss bank have brought CHF south in a hurry over the last week.