Macro/FX Watch: AUD loses ground on RBA’s dovish hike

AUD: RBA’s rate hike and an end to the tightening cycle

A typical buy the rumour, sell the fact reaction for the AUD following the RBA announcement to hike rates by 25bps to 4.35%. Rate hike expectations had built in over the last few weeks, taking AUDUSD to be one of the top gainers on the G10 board. AUDUSD pierced through 0.65, partially helped by a dovish Fed meeting outcome and weaker than expected US jobs data last week.

However, market was pricing not just a rate hike at today’s meeting but also some odds of another rate hike in this cycle. But the RBA’s statement failed to confirm that hawkishness with a data-dependent approach being adopted to assess further tightening needs. The RBA still sees inflation holding above its 2-3% target into 2025, keeping open the door to further tightening, but the market is unlikely to expect any further rate hikes unless Q4 CPI data shoots higher again. AUDUSD slumped to 0.6440 at last check, also erasing a slight positive reaction to the increase in China’s import.

China imports showed a stark improvement, coming in at +3.0% YoY vs. -5.0% YoY expected and -6.3% prior. This is a positive sign on the recovery in Chinese consumer, which seems to be cautious amid the property sector rout and volatility in government policies. Exports however remained in deep red, coming in at -6.4% YoY from -6.2% prior and -3.5% expected. If CPI later this week confirms an improving demand outlook, that will be a boost to the China recovery story and help proxy China FX such as AUD and EUR.

What is clear from today’s meeting is that the RBA is done. Market will look to price in rate cuts now for next year. Any softening in data will push the rate cut pricing to H1 or even Q1 of next year. As such, AUD has seen the end of gains driven by the RBA pricing. From here on, China’s recovery will become the key driver for AUD once again, along with the global risk sentiment. Momentum has turned bearish for AUDUSD and key support is seen at 0.6395/0.6370.

Fed speakers, including Powell, will be key this week. We believe there is still scope for hawkish posturing, and that can make AUD test the support levels. However, if Fed official comments further hint at the end of the tightening cycle, then AUDUSD could run back higher for a test of the 0.65 handle. AUD has gained the most against CHF and JPY since the October 25 release of Q3 CPI. AUDSGD also remains poised for further downside towards the 0.86 handle if it closes below 50DMA at 0.8727 today.

Market Takeaway: RBA rate hike cycle has ended and momentum for AUDUSD has turned bearish, exposing 50DMA support 0.6395.

EUR: Losing momentum ahead of key resistance

EURUSD turned lower from 1.0750, just ahead of key resistance at 1.0770 despite the services and composite PMIs being left unrevised. From here on, data this week is scarce on both sides of the Atlantic. Any easing in ECB’s 1yr and 3yr inflation expectations in line with the slowing inflation prints lately could drive further declines in EUR. The German-Italian bond spread also remains on watch especially with Fitch’s rating decision on Italy due on Friday.

Meanwhile, hawkish remarks from Fed officials will likely carry more weight compared to those of the ECB, and there still remains room to expect further USD strength especially after the post-NFP decline. Weakening US growth does not yet erode the US exceptionalism story as US economy still remains more upbeat compared to rest of the world. Break below 1.07 handle will bring a test of 1.0680 support, and downtrend could become entrenched if that is broken. EURUSD needs a break above 1.0770 to extend the uptrend.

Market Takeaway: Scope for further correction in EURUSD towards 1.0680 support and momentum will turn bearish if that breaks.