RBA rebuke takes heat out of the AUDUSD rally

The RBA believes the Australian economy will return to growth in the December quarter but not back to its pre-delta path until the 2nd half of 2022. The bank reiterated it is not expecting economic conditions to improve sufficiently for a rate hike before 2024.

Rising energy prices are fanning inflation expectations and prompting interest rate curves to reprice higher globally. Locally the release on Monday of an uncomfortably high inflation reading in New Zealand pressured interest rates higher in Australia, presenting a challenge to one of the critical elements of the RBA’s monetary policy settings.

The yield on the April 2024 bond spiked to as high as 0.2 percent, almost double the RBA’s 0.1 percent target. The yield on the 3 year November 2024 bond increased from 55bps on Friday to ~85bps yesterday. Essentially the market moved to price in an interest rate hike as early as May 2022 and a cumulative 100bp of rate hikes by late 2023!!!

After the market closed yesterday, in a counter to the challenge from the bond market, the RBA announced an increase in the cost it loans out April 2023 and April 2024 bonds from 25bp to 100bp. In London trading, the yield on the April 2024 bond dropped to around 0.125 percent, within the target range.

To support this measure, the RBA announced this morning it would buy $A800m of Semi-Government securities maturing July 2024 to Nov 2032. Combined, these actions have served to take some heat out of the recent rally of the AUDUSD.

That said, after breaking above the September .7478 high, there is potential for the rally to extend towards the 200-day ma currently near .7570c, where signs of exhaustion would warn of a possible turn lower. Aware that a sustained break above .7570/.7600c would indicate the rally can extend towards .7800c.

Source Tradingview. The figures stated areas of October 20th, 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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