Australian Dollar Whipsaws After RBA Pause Again on Hiking Cycle. Lower AUD/USD?

Australian Dollar, AUD/USD, RBA, CPI, Fed – Talking Points

• The Australian Dollar slipped after the RBA left rates unchanged at 4.10%
• Keeping rates unchanged was mostly expected but caught some by surprise
• Quarterly CPI was cited by the RBA as they look at the data points ahead.

The Australian Dollar initially spiked before running lower after the RBA once again refrained from tightening monetary policy, leaving the cash rate at 4.10%. The S&P/ASX 200 bumped up on the news.

Going into today’s decision, traders and commentators were divided on the potential outcome.

The futures interest rate market had priced in a less than 20% probability of a 25 basis point hike while a Bloomberg survey of economists saw 18 in favour of a lift and 12 looking for no change.

The market has now ascribed around a 50% chance of a 25 basis point hike for the remainder of this tightening cycle.

In the accompanying statement, Governor Lowe said, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”

Regarding inflation, they also noted that “Inflation in Australia is declining but is still too high at 6 per cent.”

The June quarter-on-quarter headline CPI was 0.8% which was below the 1.0% anticipated and 1.4% prior.

The RBA’s preferred measure of trimmed-mean CPI was 5.9% year-on-year to the end of June which is also less than the 6.0% estimated and 6.6% previously.

The trimmed mean quarter-on-quarter CPI read of 1.0% was below the 1.1% forecast and 1.2% for Q1.

Today’s decision comes after the appointment of Michelle Bullock as the new RBA Governor was announced just over two weeks ago. She will take up her new role in mid-September.

Ms Bullock has been the Deputy Governor of the bank since April 2022 and has been with the institution since 1985. She has a reputation as a leading economist in her own right.

The appointment is mostly viewed as a steady transfer of leadership at a critical time for monetary policy at the RBA.

Earlier today, Australian building approvals data for June sunk by -7.7% month-on-month, which was not as negative as the -8.0% anticipated and -8.1% prior. The current unemployment rate of 3.5% is near multi-generational lows.

The tight labour market was referenced in the accompanying statement and the bank is of the belief that the unemployment rate will need to climb toward 4.5% in order for CPI to get back down below 3%.

Looking forward, the bank has made it clear that the incoming data will enable them to determine the impact of the increase of 400 basis points to borrowing costs since May last year.

It is possible that there could be higher volatility around economic data than has been the recent case for Australian financial markets.

The RBA’s full monetary policy statement can be read here.

AUD/USD 1 MINUTE CHART PRICE REACTION TO RBA HIKE

Live prices can be found here.

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter