The Australian dollar (AUD) soared to its highest level versus the US dollar since June last year after the Reserve Bank of Australia adopted a hawkish tone in its monetary policy statement.
Going against what most economists had expected, the RBA dropped the word “patient” from its statement after the monetary policy meeting on Tuesday (5 April) when describing its projected timeline for hiking interest rates. But the central bank kept the interest rate unchanged for now.
Following the statement, the AUD/USD exchange rate climbed 1.27% to 0.7638, the highest level since 16 June 2021, before the lockdowns due to Covid-19’s Delta and Omicron variants.
AUD/USD exchange rate
RBA’s hawkish turn
The RBA’s monetary policy statement was broadly hawkish regarding all aspects of the economy. “The Australian economy remains resilient and spending is picking up following the Omicron setback. Household and business balance sheets are in generally good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed,” the central bank governor Philip Lowe said in a statement.
“The strength of the Australian economy is evident in the labour market, with the unemployment rate falling further to 4% in February. Underemployment is also at its lowest level in many years,” Lowe added.
Regarding the lift-off in interest rates, the governor said that the central bank will have additional important evidence over the coming months on inflation and evolution of labour costs, and it will assess the information to set its policy.
Lift-off in June?
“We look for the RBA to tighten by 15 basis points in June (previously September) with follow-up 25 basis points rate hikes in July and August…The driver of the shift in view is the removal of the word ‘patient’ from the statement. We’ve gone with a June start rather than May because the RBA specifically states that ‘over coming months’,” said David Plank, senior economist at Australia and New Zealand Bank (ANZ) in a note.
“A May rate hike should not be ruled out, however. A surge in core inflation in the Q1 CPI [consumer price index] could leave the RBA thinking it has little choice but to move. The timing of the May federal election is a complication. One option is for the RBA to make the case for a rate hike in its May statement and then deliver it in June when the labour market data provides more confirmation,” he added.
AUD will gain more
The hawkish turn by the RBA and aggressive rate hikes will help the AUD, commonly known as the Aussie, gain more strength in the coming months. Robert Rennie, head of financial strategy at Westpac, said in a note that the AUD/USD exchange rate could move up to 0.78 in the second half of the year.
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“Clearly upcoming inflation data (Q1 CPI April 27 and Q2 CPI July 27 plus Q1 WPI May 18) will be critical for the RBA and the evolution of market pricing. However, the break-up through 0.7550 opens further near-term upside potential and a move up towards 0.7650/0.77 is possible given ongoing support from thermal energy prices plus expectations of significant Chinese provincial government investment,” he added.
According to Francesco Pesole, FX strategist at ING Bank, “the notion of imminent RBA tightening” can provide support to the Aussie in the short term at 0.76 levels versus the US dollar. However, he said in a note that market pricing on RBA tightening has gone “too far” and the AUD’s gains will be curbed by the end of the year.
Rate hikes will be aggressive
There is disagreement among economists when it comes to the pace of rate hikes. Marcel Theiliant, senior Australia, New Zealand and Japan economist at Capital Economics, expects a more aggressive rate hike cycle than consensus.
“We’ve pencilled in a rise in the cash rate to 1.75% by the middle of next year, which is above the analyst consensus of 1.25%. However, we doubt the Bank will be able to lift rates to 3.25% as the financial markets anticipate,” Theiliant said in a note, adding that he expects the central bank to start raising interest rates from June.
