Australian Dollar Rises after RBA Meet

The Australian dollar has extended its rally and is trading at 0.7100. AUD/USD has had an impressive week so far, up 1.44%.

RBA optimistic but cautious

The RBA policy meeting did not contain any surprises and could be summarized as ‘hawkishly dovish’, or ‘mildly hawkish’ if you prefer. As expected, the RBA held the cash rate at a record low of 0.10% and reiterated that it won’t raise rates until inflation is sustainably within the RBA target band of 2-3%. This definition gives the bank a convenient out –  even if inflation is within this band, the bank can take its time before hiking, saying that it wants to ensure that inflation remains “sustainable”.

The bank highlighted a lot of positive developments, saying that wage growth, business investment and consumer spending were expected to improve, and that the economy would fully recover from the Covid pandemic in H1 of 2022. Still, the bank remains cautious, citing omicron as a new source of uncertainty. The RBA said it would not consider scaling back its QE programme before the next meeting in February, meaning that no tightening in policy will take place until early next year at the earliest.

This leaves us with a significant disconnect between the RBA and the markets remains with regard to monetary policy – the RBA saying there won’t be a hike before 2023, while the markets have priced in a rate hike as early as July 2022. The markets are also projecting that the bank will wind up QE in February.

The Australian dollar, a bellwether of risk sentiment, has received a boost in the arm this week as Omicron jitters have eased. This follows comments from Anthony Fauci, President Biden’s chief medical advisor, that Omicron could be milder than previous Covid versions. This is a welcome development for the Aussie, but it’s prudent to keep in mind that an Australian downturn is only a negative headline away. With market volatility lurking in the air, it is prudent to remain cautious.

AUD/USD Technical

• There are resistance lines at 0.7118 and 0.7235
• AUD/USD has support at 0.6938. Below, there is support at 0.6875