AUD rebounds as RBA minutes signal more rate rises

[MongiIG]

The AUD kicked off the new week with a strong rebound, rising around 1.6% on Monday, primarily taking advantage of the USD weakness and the regained confidence in the global economic outlook.

Source: Bloomberg

 

Forex Inflation Australian dollar United States dollar Interest rate Australia

Hebe Chen | Market Analyst, Melbourne | Publication date: Wednesday 19 October 2022 

RBA October meeting minutes

The Reserve Bank of Australia released the meeting minutes for October’s policy meeting on Tuesday. The RBA is staying firm that the official interest rate will keep rising well into next year despite the bank’s pivot to a smaller increase this month.

The RBA emphasised that their job to curb inflation was not yet done, stating, “The Board agreed on the importance of returning inflation to target and the need to establish a more sustainable balance of demand and supply in the Australian economy. This was likely to require further increases in interest rates over the period ahead.”

According to the RBA, the cash rate in Australia is anticipated to be around 3.4 percent by the end of 2022 and peak slightly above 4¼ percent in mid-2023.

However, the future market is more conservative about that estimation. Up until the 17th of October, the market believed that the interest rate would not go above three percent by Christmas 2022 and would peak on October 2023.

Source: ASX

RBA’s risk ahead

While the RBA is appropriately determined to slow the pace of monetary tightening, the upcoming uncertainties may prompt the central bank to reconsider its strategy.

According to Statistics New Zealand, the nation's September quarter CPI rose 2.2% quarter-on-quarter (vs an estimated 1.5%) and 7.2% on an annual basis, even though the Reserve Bank of New Zealand has raised the New Zealand cash rate to 3.5%.

Moreover, Australia's September jobs report is due out later this week and any additional evidence on the tightness of the labour market will build up more upside risks for inflation. In that case, the credibility of the RBA's path to reduce inflation will come into question as it would be costly to re-establish the previous cycle.

AUD/USD technical analysis

The AUD/USD has been continuously sliding down this year. Last week, the pair arrived at the lowest level since April 2020. While the fundamental drivers, the strength of the greenback and the weakening economic outlook are yet to shift, the near-term technical picture is coming to an inception point.

First, the Relative Strength Index (RSI) crossed above oversold for the first time in two weeks after the pair touched the two-year-low level. Meanwhile, a similar crossover can also be found from the MACD print. Considering this, a near-term rebound should bring the target of 0.6380 in view.

However, buyers also need to be aware that the long-term path for the pair still points to the south if taking hints from the monthly chart. Hence, the possibility of a return to the March 2020 low at 0.6180 remains on the cards.

AUD/USD daily chart

Source: IG

AUD/USD monthly chart

Source: IG