Chief Investment Strategist
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”.
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.
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.
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.
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