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Aussie made fuss. Forecast as of 05.10.2022

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Can the Reserve Bank of Australia steal the show? It appears that yes! Any examples become contagious when investors wait for a dovish pivot from the Fed. Let’s discuss the topic and make up a trading plan for AUDUSD.

Weekly Australian dollar fundamental analysis

The Reserve Bank of Australia caused a stir in the financial markets with its decision to raise the cash rate. However, £65bn asset purchase by the BoE was needed to save the pound, while the RBA verdict did not allow AUDUSD to take advantage of such a growth driver as an improvement in global risk appetite.

Only 4 out of 28 Bloomberg experts predicted a 25 bps rate hike. According to Philip Lowe, borrowing costs have risen substantially in a short period of time. Thus, the RBA decided to raise them by a quarter of a percentage point to 2.6%, taking into account the assessment of the prospects for inflation and economic growth. The Board of Governors expects the monetary tightening to continue.

Dynamics of the RBA rate and inflation in Australia

Source: Reuters.

The futures market responded by lowering the expected cash rate ceiling from 4% to 3.6%, while Australia’s bond yields marked the most serious collapse since October 2008. At that time, the RBA cut the main interest rate by 100 bps at once in a single meeting.

Following expectations of changes in the cash rate, forecasts for the federal funds rate fell from 4.7% to 4.5%. Investors took this as a precedent and began to expect that the Fed would put on the brakes. Especially against the backdrop of deteriorating US macro statistics. In fact, Jerome Powell and his colleagues are not going to do this. Most FOMC officials intend to raise borrowing costs another 75bp at the next meeting.

The RBA’s decision pulled the plug on AUDUSD bulls. As a rule, with a rally in US stock indices and commodities, including oil, the pair grows, but not this time. While the Fed and other central banks are aggressively raising rates, the RBA is slowing down the rate of monetary restriction. How can the Australian dollar not fall under such conditions?

In fact, the RBA’s verdict is logical. Consumer prices in Australia have not risen as high as in the US, UK or the eurozone. So why would the Australian authorities ruin their own economy by excessive monetary tightening? It is possible to avoid a recession with a competent monetary policy.

Weekly AUDUSD trading plan

The RBA’s lagging behind the pack is putting serious pressure on the Australian dollar. Strengthening the AUD requires not only an improvement in global risk appetite, but also support from the central bank. Without the help of the RBA, the AUDUSD downtrend could recover earlier than the rest of the G10 currencies. At the same time, the pair’s fall below the support at 0.645 may become a reason for entering short trades.

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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