AUD outperforms as RBA delivers hawkish policy update

AUD: RBA signals more concern over upside inflation risks.

Following a hawkish policy update from the RBA yesterday as already expected on my blog here; https://acy.com.au/en/market-news/market-analysis/rba-to-hike-25bps-l-s-090435/, the Australian dollar emerged as the top performing G10 currency overnight.

The RBA's decision to raise its policy rate by an additional 0.25 percentage point to 4.10% led to a strengthening of the Australian dollar by approximately 0.7% against the US dollar and 0.5% against the New Zealand dollar.

In its policy statement, the RBA emphasized that inflation remains too high, and the interest rate increase aims to instil greater confidence in achieving the inflation target within a reasonable timeframe. The RBA also expressed concerns about elevated services price inflation observed globally. The central bank will closely monitor labour costs and price-setting behaviour of businesses.

Consequently, the RBA hinted at the possibility of further monetary tightening, depending on economic and inflationary developments. These recent developments challenge the market's expectation that the RBA had reached the end of its hiking cycle. This situation supports my recommendation for a long AUD/NZD trade, benefiting from the growing policy divergence between the RBA and the Reserve Bank of New Zealand (RBNZ) in the short term. Unlike the RBA, the RBNZ recently signalled the conclusion of its rate hike cycle after raising its key policy rate to a peak of 5.50%.

WEAKER GROWTH & INFLATION IN US SERVICE SECTOR

Source: Bloomberg, Macrobond & MUFG GMR

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