The AUD/USD pair has strengthened as market risk sentiment has improved and the dollar has weakened. The Australian Dollar (AUD) continued to gain ground for the fourth consecutive day and could hit a three-month high.
The improved risk appetite can be attributed to the possibility that the US Federal Reserve (Fed) has completed its monetary policy tightening. In the meantime, all eyes are on Australia’s central bank which is expected to raise its key policy rate by 25 basis points to 4.35% on Tuesday.
Kit Juckes, Chief Global FX Strategist at Société Générale, believes that the RBA meeting will determine short-term sentiment for AUD/USD, but relative yields suggest AUD/USD could break higher. While that may appear unlikely, Société Générale expects a 25 bps rate hike. Big Australian banks including ANZ, CBA, NAB, and Westpac also anticipate the RBA to hike rates by 25 basis points.
Reserve Bank of Australia
Markets expect a 25 basis points increase, as Australian inflation remains elevated, which will provide support to the Australian dollar.
Last quarter, inflation came in higher than expected and led markets to price in one more rate hike. While economists have been expecting one last rate hike this quarter, according to the latest 30 Oct. – 2 Nov. Reuters poll, almost 90% (34 of 39) of economists expect another rate hike on the 7th of November. This will be the first rate hike under the Governor Michele Bullock who anticipates further rate hikes if the inflation outlook is revised upwards.
Taylor Nugent, senior economist at NAB explained that the expectation the RBA would hike in November was based on the fact that the central bank’s forecast was too optimistic on inflation through the second half of 2023. He added: “The RBA was hopeful they wouldn’t need to do more, and they had been taking the approach they would try and do as little as possible while still seeing inflation back to target. And that did leave them more exposed to upside risk than if they had moved rates higher sooner.”
More rate hikes on the horizon
While many major banks including the Reserve Bank of New Zealand have paused and are in a wait-and-see mode, the RBA is widely expected to proceed to hike rates. ANZ economist Madeline Dunk said that while it is likely the RBA will hike 25 basis points, the risks are tipped towards more action. She said: “If we do see a hike in November…it’s much more likely we’re going to see another hike rather than cuts anytime soon. And that higher for longer theme is something running through markets globally because a lot of people have been surprised at the resilience of economies and also the stickiness in inflation.”
Despite the RBA’s policy tightening of 400 basis points, house prices in Australia have reached previous peaks. If inflation continues to be stubborn and the property market red hot, then the RBA may need to remain hawkish and potentially hike rates further.