Surprise RBA Rate Hike Spurs Currency Volatility
AUD
The Aussie dollar has for the most part gained ground after volatility was injected into markets yesterday with the surprise RBA interest rate hike reverberating through currency prices. The cash rate was raised by 25 bps from 3.6% to 3.85% against market expectations the RBA would hold rates flat as they did at the last meeting. Markets had predicted there was only about 10% chance of a raise, so the 25bp increase sparked immediate and pronounced AUD strength. On the announcement of the news the AUD gained on average about 1% in a matter of minutes, holding these higher levels against its major trading pairs before a retracement began to take place. Governor Lowe said in the press conference following “Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range. Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.” Also given that the Fed in the US is expected raise interest rates one more time tonight then hold for the remainder of the year, the RBA may have seen this as their last chance to catch up. Governor Lowe also added in his speech that “Some further tightening may be required [to return inflation to 2-3% in a reasonable timeframe". The ASX lost -0.9% off the back of the interest rate announcement. Weaker Copper (-1.6%) and Iron prices (-0.8%) overnight contributed to the retracement of the short-lived AUD rally. Today, Retail Sales m/m are printing, following a modest +0.2% m/m increase in February, markets are expecting a rate of growth of 0.2% again. High-frequency card spending data and recent rhetoric from retailers suggest momentum softened in the month.
USD
The Aussie is up against the USD from this time yesterday at 0.6662, rallying a massive 88bps in the aftermath of the RBA’s interest rate decision, before retracing about 50bps in the London and NY trading sessions overnight. More volatility expected in markets in tonight’s session with the Federal Reserve's interest rate decision being announced at 4:00am (EST), the market is currently predicting a 25bps lift, from 5% to 5.25%. The Fed is currently trying to manage two major issues on opposite ends of the spectrum, with inflation far out of the ideal range, currently sitting at 5%, and doubts in the banking system, with yet more banks in shaking water after being forced to liquidate and realise losses on out of the money positions, to cater to cash demand.
EUR
The AUDEUR pair is up slightly from yesterday's levels at 0.6052, after a 78bp rally off the back of yesterday's unexpected RBA interest raise, before retracement gave back over half of the gains made. Eurozone CPI Flash Estimate y/y, and Core CPI Flash Estimate y/y printed last night, both on their market expectations of 7% and 5.6% respectively and stubbornly refusing to show a decline in prices pressures. To Euro equities and the CAC and DAX were down 1.4% and 1.2% respectively. This was off the back of the ECB announcing European banks were tightened credit standards more than expected in the first quarter. Looking ahead and the Unemployment Rate for the Eurozone is set to be released tonight, expected to come in flat at 6.6%.
GBP
The AUDGBP is up slightly at 0.5327, after the pair briefly reached a high of 0.5373, a 1.3% increase off the higher Australian interest rate announcement, before retracing about half the gains and settling at current levels. The FTSE lost a large -1.2%, off the back of the European bank credit standards being tightened further than expected over this year’s first quarter. No data out the UK today, but tomorrow Final Services PMIs will be released, expecting an expansionary figure of 54.9.
NZD
The AUD fared worse against the NZD, being down on this time yesterday's level, currently sitting at 1.0727. A Large 1% rally for the AUD came off the back of the RBA’s interest rate hike, before general market forces drove down the Aussie against our antipodean counterpart. Further, NZD strength was encouraged this morning with better than expected employment numbers released a short time ago in New Zealand. The official Unemployment Rate was expected to come in at 3.5%, but printed flat on last month’s number at 3.4%. The job creation figure, Employment Change q/q also printed much better expected, and much better than previous, markets predicted a 0.5% increase, but this printed at 0.8%. RBNZ Governor Orr is holding a press conference in Wellington today at 11am (EST), about the Financial Stability Report, which is also printing to the public today.