RBA: AUD surge on hawkish shift

RBA:AUD soars as inflation forces the RBA’s hand

The RBA hiked by 25bps and increased interest rates to 0.35bps on Tuesday. 

Prior to the RBA meeting on Tuesday we had been considering the prospect of a weaker GBPAUD. The RBA had so far avoided hiking interest rates as the RBA board were uncertain to the extent to which inflation was going to stick. One aspect the RBA board had said they wanted to see was inflation in the wage data. Now the wage price index in released the middle of May, so the fact that the RBA hiked before that date is a strong message. The RBA are now acting to control inflation. 

The two main reasons the RBA hiked :

1. The economy has been ‘very resilient, unemployment is low and economic growth is expected to be strong this year’
2. The second reason is that ‘inflation has picked up more quickly, and to a higher level, than was expected and there is evidence that labour costs are increasing more quickly’. 

You can read the full May 03 monetary policy decision here.  The RBA also picked up on a very important point, namely that many households have more debts than previously and that many households have ‘never experienced rising interest rates’. This is a pain area that people will not want to go and many central banks are going to have to hike rates rapidly to contain inflation, but have to remember that going too fast may inflict too much pain, too quickly. 

RBA’s Governor Lowe comments post the RBA meeting

Governor Lowe reinforced the message of the statement post the meeting. 

• Lowe expects further interest rate increases will be necessary in the months ahead
• He has an open mind about how fast rates need to increase. He sees a more normal level of interest rate to be 2.50%. 
• Governor Lowe does not preclude a bigger or smaller rate move in the future. 

The takeaway 

It is reasonable to expect AUDCAD gains from here as the CAD looks close to peak bullishness. Stops can be placed as outlined below. Target marked. The main risk is another leg higher in oil, a drop in global stocks, and a sharp slow down in China’s economy. if the Fed are dovish tomorrow then AUDUSD upside makes sense too.