- The RBA retained a tightening bias at its February interest rate decision
- It remains concerned about services inflation which is heavily influenced by labour market conditions
- AUD/USD traded in lockstep with Chinese markets throughout much of the RBA press conference
The Reserve Bank of Australia (RBA) continues to see the risk that rates may increase again despite delivering updated forecasts showing faster progress in bringing inflation back to within its target band. For AUD/USD traders, there was more interest in the rally in Chinese stocks and currency than what the bank had to say. ASX 200 traders received the message that rate cuts are unlikely to occur imminently.
RBA retains right to hike again… for now
Ahead of today’s decision which not only included the policy statement but also updated forecasts and a press conference from Governor Michelle Bullock, the main question markets wanted answered was whether the RBA would jettison its tightening bias, indicating the risk that rates may need to be increased further.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out,” it said.
While a softer tone than that offered two months ago when policymakers last met, perhaps because the statement is now written by the board rather than the Governor solely, it signals the RBA is not yet ready to signal the top is in for rates.
The pivot party will have to wait for another day.
RBA’s forecasts are more dovish than three months ago
However, the bank’s updated quarterly forecasts suggest the bank is not too far away from joining most other developed central bank peers in shifting the debate as to when to begin cutting rates.
Relative to three months ago, GDP growth was downgraded, unemployment seen higher while headline and core inflation are now expected to move towards the bank’s 2-3% target bank earlier. Importantly, those forecasts were premised on the cash rate being reduced by over 100 basis points between the middle of this year and mid-2026, far more easing that what was incorporated into the forecasts three
Job market data should increase in importance
While the RBA says it needs to be “confident that inflation is moving sustainably towards the target range” before pivoting towards rate cuts, its main concern is services inflation which is influenced by labour market conditions, including wage pressures and productivity growth.
It means that for the RBA to get the confidence it needs to cut, it probably needs to see the job market weaken more than it already has. For traders, that gives you a good clue as to what data releases the markets will be paying closer attention looking ahead.
The washup from the event was markets pared back expectations for the timing of the RBA’s first rate, pricing an August move at around 80%. Late last week, a cut was 100% priced for June. The shift largely reflects a recalibration of expectations on when and how much the Federal Reserve will cut.
AUD/USD driven by Chinese yuan, stocks
While the RBA provided plenty of talking points – including the standard of the questions provided to the Governor at her press conference – apart from a small pop on the bank retaining a tightening bias, AUD/USD traders were more fixated on what was going on in China than RBA headquarters at the top of Martin Place in Sydney.
I posted the below chart on social media following the conclusion of the press conference, showing the correlation between AUD/USD and USD/CNH running at -0.9 or lower over much of the event. That suggests that during Asian trade this week, the performance of Chinese markets may dictate how the Aussie fares.
Zooming out on the AUD/USD using the daily chart, the pair traded up to resistance at .6520 on the back of the China surge before stalling, putting it on track for a third straight failure at this level. Below, apart form minor support around .6450, there’s not else visible until you get back to .6350. On the topside, a clean break of .6520 opens the door for a bounce back to resistance at .6610.
ASX 200 not impressed by lack of rate cut urgency
ASX 200 traders were a little more interested in what the RBA had to say, although futures did find a late bid as Chinese stocks rallied. Resistance is located at the prior record high of 7665 with support located at 7500, 7410 and again at 7300.
-- Written by David Scutt
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