RBA Signals Multiple Further Rate Hikes Ahead

AUD

The Aussie is trading higher this morning against all majors (Yen excluded) after the RBA’s hiked interest rates again by 25bps yesterday, moving the cash  rate from 3.10% to 3.35%. RBA Governor Lowe, again, pointed to reducing inflation as his current primary goal with the rate hikes, saying “In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy. Inflation is expected to decline this year due to both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.” He acknowledged the squeeze these hikes were placing on households, but also pointing out high inflation makes life difficult for people, and damages the functioning of the economy. If high inflation became entrenched into people’s expectations, it would be very costly to reduce later. Australian Trade Balance also printed yesterday, coming at a surplus of 12.24B, below the expectation of a surplus of 12.50B. In more long-term focused news, the Chinese & Australian trade ministers held their first bi-lateral meeting since 2019 earlier this week. With Aussie trade minister Don Farrell urging China to lift official and unofficial barriers that are costing exporters 20 billion Australian dollars a year (trade restrictions on Australian exports including wine, coal, beef, seafood, barley and wood). Farrell said that he had agreed with his Chinese counterpart Wang Wentao to enhance conversation as a pathway “towards timely and full resumption of trade”. This meeting is another step in a thawing of Sino-Australian relations. A liberalization of trade relations between the two countries would certainly result in a mutually beneficial economic outcome, which historical may drive the AUD higher as this situation unfolds. On Friday the RBA is releasing a statement expanding on their rate hike decision.

USD

The AUDUSD pair trades slightly higher this morning, opening up at 0.6951. Commentary from FOMC Chairman Jerome Powell sparked some volatility overnight but Wall St ultimately remained in positive territory. With the AUDUSD hitting a high of 0.6989 in the early hours of the morning, before retreating. Entering the final hour of the session, the NASDAQ was trading +1.3%, the S&P 500 +0.9% and the Dow Jones +0.4%. US yields were relatively unchanged while crude oil rallied 4.2% to $77.20 a barrel. Chairman Powell beginning his speech by saying that the disinflationary process had begun though was otherwise fairly hawkish. He said that this disinflationary process had a long way to go with inflation unlikely to move back close to 2% until 2024, he said that further rate hikes were likely and that rates had not yet reached restrictive territory. He also added that if strong labour data continued, peak rates may be higher than expected. 

EUR

The Aussie has consistently risen against the Euro since the RBA announcement yesterday, moving from 0.6388 at the time of announcement to a high of 0.6492 in the following 12 hours. Retracing back to 0.6478, with about 30bps of volatility at the beginning of this morning’s trading session. German Industrial Production was printed last night, coming in well below the expectation of -0.7% of -3.1%. French Trade Balance came in at a deficit of -14.9B below expectations of -12.1B, with little immediate reaction from markets. Some hawkish ECB commentary came from Nagel who said that rates were not yet in restrictive territory, more “significant” hikes were needed and rate cuts were not on the agenda for the foreseeable future. Important data out of the EU later this week includes the EU economic forecasts on Thursday night, the European Commission’s basis for evaluating economic performance and trends of EU member state in regard to potential austerity measures and other forced spending cuts.

GBP

The Aussie trades higher against the pound sterling this morning, gaining about 40bps since this  time yesterday – opening at 0.5759, bouncing off a high of 0.5782 late last night. A few small pieces of UK data yesterday with BRC retail sales monitor y/y coming in flat at 3.9%. The House Price Index came in at 0.0% change for the month of Jan, a better result than the expected -0.8% - putting a stop in the 4 consecutive months of falling house prices in Britain. Market moving data from the UK later this week is the Monetary Policy Report Hearings – happening on Thursday night, and the GDP m/m printing on Friday night – with a -0.3% currently priced in as the most likely outcome.

NZD

The Aussie is travelling higher this morning against our small friends to the east. The AUDNZD pair opening at 1.0996 – just getting over that 1.1000 handle briefly this morning. This is a large move as this pair was trading at 1.0909 at opening yesterday morning. New Zealand’s largest milk producer and exporter Fonterra released the details of their latest dairy auction with the GDT Price Index up 3.2% while Whole Milk Powder prices rose by 3.8%. No reaction to the data. Nothing major out of NZ until next week’s inflation expectations q/q.