CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 87.41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

AUD fails to find rate support, but weaker USD lends a hand

By Adrian Holliday

12:37, 4 October 2022

Share this article
In this article:
EUR/USD
EUR/USD
1.05069 USD
0.00358 +0.340%
AUD/USD
AUD/USD
0.67137 USD
0.00229 +0.340%
DXY
US Dollar Index
104.9721 USD
-0.246 -0.230%

Subscribe to Weekly Highlights

The major market events for the week ahead right in your inbox. Subscribe
Koala family relief – for now
RBA swerves a fat rate move giving Oz home owners some support – Photo: Getty

The Australian Reserve Bank (RBA) decision to raise the cash rate by just 25 points, swerving a 50 bps move pencilled in by much of the market, setting the rate at 2.6%, sent AUD almost 1% lower on Tuesday.

“The cash rate,” said Governor Philip Lowe, “has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”

Meanwhile GBP/USD at 1.1336 has surged to its highest level for two weeks, in part responding to chancellor Kwarteng’s mini-budget dialling back. Earlier this morning it touched 1.14; EUR/USD is 0.64% higher at 0.9897.

RBA fails to deliver

Back to down under: clearly Governor Lowe is not persuaded to continue the pugnacious rate-hiking path of other central banks, even as AUD drifted last week to $0.6363, a two-year nadir.

While the RBA rise was not a full-fat hike, Lowe says he’s still willing to tighten further – the rate hike cycle brakes are being feathered, not locked, for now. 

AUD can also take a little padding from – finally – a knocked-back USD. Around mid-morning DXY was printing 111.04, down 0.64%. Given USD’s stupendous bull run, markets are increasingly sensitive to US economic numbers. 

What is your sentiment on AUD/USD?

0.67137
Bullish
or
Bearish
Vote to see Traders sentiment!

Manufacturing mo-mo lost

Look no further than yesterday’s super soft US ISM manufacturing print, slamming to 50.9 in September compared to an expected 52.2, a huge loss of momentum from the world’s number one economy.

US manufacturing employment also dipped last month, for the fourth time this year. Markets have been more or less bolted to a US rate-hiking narrative for some time and any sniff of Fed change will see volatility snap back, from an increasingly wide number of triggers. 

Source: ISM

Feeling bad

The RBA’s dovish move today is also, very possibly, a guilt-induced nod to Australia’s growing home-owning base, previously assured by a distracted, off-the-boil RBA that interest rates would remain at rock-bottom levels until 2024. 

As Rabobank’s Jane Foley points out, the percentage of Australians who own their own home surged from 32% to 37% from 1999/00 to 2019/20.

US100

11,451.10 Price
-0.920% 1D Chg, %
Long position overnight fee -0.0164%
Short position overnight fee 0.0059%
Overnight fee time 22:00 (UTC)
Spread 1.8

Oil - Crude

72.84 Price
-2.440% 1D Chg, %
Long position overnight fee -0.0157%
Short position overnight fee 0.0013%
Overnight fee time 22:00 (UTC)
Spread 0.03

XRP/USD

0.39 Price
-0.560% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 0.00350

Natural Gas

5.87 Price
+9.660% 1D Chg, %
Long position overnight fee 0.0436%
Short position overnight fee -0.0680%
Overnight fee time 22:00 (UTC)
Spread 0.005

"The RBA has clearly been forced to backtrack on this [previous rate rise] guidance significantly this year. So far RBA rates have been hiked by 250 bps since May. 

“Confidence in the RBA’s previous predictions may have encouraged many mortgagees to stay on variable rate mortgages. This will have been a costly choice. These mortgages are linked to short-term interest rates and remain very popular in Australia.”

Why the Oz mortgage market is different

  • Fixed rate products are often for fairly short terms and many will be coming up for renewal over the next year or so. New mortgages rates will be significantly higher says Jane Foley. 
  • “This system contrasts,” says Foley, “with the US where there are typically much longer tenures for mortgages. This can slow the transmission of monetary policy to households.”
  • Some policymakers may judge a heightened pace of rate rises could risk instability.

Meanwhile Foley says Australia’s current account surplus, strong terms of trade and positive growth outlook remain AUD-supportive. 

“Although AUD/USD may struggle to hold its own versus the mighty USD on a 1-to-6-month view, we see scope for a recovery into the middle of next year.”

Shallow not deep

However AUD is far less undervalued versus USD than the majority of other G10 currencies; Australia’s CPI inflation rate is also at the shallow end of other G10 club members.  

This gives the RBA the room to sidestep the chunkier rate hikes raining down across much of the Northern Hemisphere.

“We retain our view,” adds Foley, “that AUD/USD could dip back to the 0.64 region on a one-to-three-month view, with scope to recover to 0.69 in the middle of next year.”

Meanwhile a reminder that the Bank of England's emergency quantitative easing program ends 14th October, which could see see a sell-off on gilts again, possibly rupturing into a GBP sell-off. 

And should the chancellor's medium fiscal plans disappoint, and markets lose confidence in the ability to cut UK debt, “then same again, we could see investors sell off gilts and the pound,” Equals Money market strategist Thanim Islam warns.

Related reading

Rate this article

Share this article

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Latest Forex news

Still looking for a broker you can trust?

Join the 475.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading