Australian Dollar Outlook: RBA Expected to Hike 25bps, Focus on Policy Path for AUD
18:35, 5 December 2022
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RBA Expected to Hike 25bps But Policy Path Matters for AUD
The RBA is widely expected to hike the cash rate target by another 25bps to 3.1% with money market pricing around 65%. However, much of the focus for the Aussie will centre around the tone of the statement and whether there is a shift in language that could imply a pause in the hiking cycle.
Since the prior meeting, economic data, on the whole, has been mixed. While the jobs data continues to show a tight labour market with Q3 wage price growth also accelerating at the fastest pace in a decade. Retail sales unexpectedly fell and the monthly inflation print missed expectations at 6.9% (vs 7.4% expected). As such, this has prompted markets to price in a 30-35% probability of no rate hike at the December meeting. Although, it is important to highlight that inflation remains far too high relative to the central bank's target and thus a rate hike is the most likely outcome.
In turn, while a 25bps hike may see a knee-jerk higher in the Aussie, whether the move is sustained depends on the accompanying statement. What’s more, with the RBA being one of the first banks to slow the pace of rate hikes, there is a downside risk that they provide a dovish rate hike and grow even more cautious on the outlook. Should this be the case recession trades such as bearish AUD/JPY may be the trades for a weaker AUD outlook. According to the options market, AUD/JPY implied volatility suggests a move (higher or lower) of circa 60pips.
As shown in the chart below, AUD/USD is posting a bearish key day reversal, typically a sign of topside exhaustion. This is further highlighted by the lower highs on the RSI. Support is situated at 0.6560 (200 hour MA), while resistance resides at 0.6780-0.6800.
AUD/USD chart: 4-hour time frame