AUD/USD, ASX 200: Don’t be so quick to call it a dovish RBA hike

The RBA increased Australia’s cash rate to 4.35% in November, as expected
Markets have interpreted it a dovish hike due to a change to the final paragraph of the statement
History suggests it’s rarely one-and-done when the RBA hikes rates

Traders believe the RBA is one-and done when it comes to the restart of its tightening cycle, jumping to the conclusion the 25 basis point rate hike to 4.35% in November will likely be the last. But for anyone who has been following the RBA over numerous cycles would know, when it lifts interest rates it’s rarely in isolation.

The initial reaction in AUD/USD and the ASX 200 was that the RBA delivered a “dovish” hike, sending the currency sharply lower and equities off their lows.

Was it really a RBA dovish hike?

After the initial decision was digested by traders, the next area of focus was on what the Board said in the key final paragraph of the statement.

Here’s the first sentence they encountered: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

A month earlier, the statement noted “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”

The replacement of the word “some” with “whether” has been interpreted by traders as dovish, providing optionality on how the bank may proceed. But you could also argue some provides similar flexibility, allowing to either hike or hold depending on the incoming data.

Adding to the need for caution, it’s not unusual for the RBA to be non-committal on future moves after it has just delivered one. Former Governor Glenn Stevens often used to say nothing after he adjusted the cash rate. As this is Michele Bullock’s first hike as governor, we have no certainty as to what her approach will be?

Statement full of reasons to hike

Were it not for the change of word to “whether”, much of the remaining statement was hawkish for those who read it.

“The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly,” it read, adding that “while the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected.”

On the domestic economy, it said the “risk of inflation remaining higher for longer has increased”. Economic growth has been “stronger than expected over the first half of the year” while the labour market “remained tight”. It added “housing prices are continuing to rise across the country”.

Despite acknowledging that there are “still significant uncertainties around the outlook” in both directions, inflation remains the RBA’s top priority. Given the tone of the statement outside the final paragraph, it still comes across as there’s likely more work to do in the absence of a sharp slowdown internationally.

AUD/USD moves back from seller at .6500

AUD/USD added to earlier losses following the RBA decision, moving further away from resistance located above .6500. Minor support around .6450 and the 50-day MA are the next downside levels to watch. Movements from now on are likely to be driven by global factors, along with any major forecast changes from leading Australian economists.

ASX 200 eyes 7000

For the ASX 200, it’s bounced back towards resistance located around 7000, forming a bullish hammer candle in the process. While the risk is the dovish interpretation will be proven wrong, global factors will likely determine whether this latest attempt will succeed or fail. On the topside, 7080 and 7145 are the levels to keep an eye on. Below, 6885 is the first support of note.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.