Australia Dollar Dips as Rate Rally Fizzles

Fundamental analysis of Forex market

The Australian dollar has reversed directions on Wednesday and is slightly lower. AUD/USD is trading at 0.7209, down 0.28% on the day.

Aussie runs out of steam

The RBA surprised the markets with a supersize rate hike of 50bp yesterday, double what most analysts had predicted. The Australian dollar responded with a swing of close to 100 points and held onto half of those gains. However, any hopes of a sustained post-RBA rally proved to be short-lived, as the Aussie has dipped lower today. The RBA left no doubt that it plans to be aggressive in its battle to curb soaring inflation, and we could see further 50bp hikes down the road if inflation remains stubbornly high. However, the central bank does run the risk of appearing to be in panic mode with such a large hike and runs the risk of losing credibility if inflation doesn’t peak soon.

The RBA’s aggressive hike shows that it “means business”, but the rate statement didn’t come across as particularly hawkish. Policy makers noted that inflation was higher than expected and was projected to accelerate before declining in 2023. The statement said that the rate hike would contribute to inflation falling “over time”, which certainly doesn’t provide much insight – perhaps the RBA is playing a wait-and-see game when it comes to forecasting when inflation will peak.

Yesterday’s massive hike was the RBA’s largest increase since 2000. Still, it’s worth noting that the cash rate is only at 0.85%, which means that the RBA’s rate-tightening cycle is in an early stage and has plenty more room to run. Unless inflation dips dramatically, we can expect the RBA to tighten by around another 100 points by year’s end and continue into 2023. This aggressive tightening scheme will help maintain the US/Australia rate differential, with the Fed also in the midst of a rate-tightening cycle.

AUD/USD Technical

  • AUD/USD is testing support at 0.7211, followed by support at 0.7138
  • There is resistance at 0.7280 and 0.7353