Markets Discount the RBA’s Hawkishness

The Australian dollar hasn’t moved up significantly in the aftermath of the RBA’s hawkish hold although AUDUSD’s downtrend seems to have paused, while the S&P ASX 200 (symbol ‘AUS200’) has held near all-time highs. Although the rate of inflation in Australia has declined, it remains significant above the RBA’s target of 2-3%. This article presents a summary of recent economic conditions affecting the Australian dollar and S&P ASX 200 and looks briefly at the charts of these instruments.

The board of the RBA said on Tuesday that it can’t rule out another hike to the cash rate. However, participants are ignoring this signal, favouring a cut in the near future. No current projections suggest an increase in rates, while according to Bloomberg the chance of a cut in May is around 30%, 85% by June and close to 100% chance of at least one cut by August.

Skepticism on another hike has some support from recent inflation data:

Last quarter headline inflation declined slightly more than expected to 4.1%, coming in the context of a clear downtrend last year. The RBA also hiked the cash rate in November 2023, so rates are now higher than inflation in Australia and likely to remain so at least for a few months. Runaway inflation has generally been less of an issue for Australia’s export-driven economy in the last few years compared to other countries such as the USA or the UK. Most traders view a pause for a few months as the effects of the latest monetary tightening display themselves as much more likely than another rate hike.

Job data from Australia over the last few months show that the labour market is cooling off slightly, but there hasn’t been a notably rise in unemployment yet:

Although unemployment rose to 3.9% at the end of last year, this is still significantly below the norm pre-Covid and within half a percent of the record low reached in the fourth quarter of 2022. Combined with low but consistent GDP growth since 2022, the economy seems to be quite resilient, so there’s no immediate pressure on the RBA to cut rates, but moderating inflation probably suggests no need for more hiking anytime soon either.

Australian Dollar-US Dollar, Daily Chart

The Aussie dollar didn’t react much to this week’s news from the RBA. The initial gain was retraced quite quickly within the context of an overall short-term downtrend. The US dollar’s fundamentals are more in focus now, with expectations for the Fed’s first cut pushed back later in the second quarter.

The 50 SMA is about to death cross the 100 while ATR has declined and the slow stochastic is very close to oversold. A move back above the 50% weekly Fibonacci retracement seems unlikely for the moment since that area was rejected last month. It’d be possible to see a sideways trend developing around the current area if next week’s American inflation and Australian job report are more-or-less in line with expectations.

However, the break below 65c could mean that the price can continue down to around 63.5c in the medium term. This depends on how traders expect the Fed to act over the next few months, so American inflation on Tuesday 13 February is the key upcoming release to monitor.

S&P ASX 200

Like many other indices apart from in China, the ASX has continued its gains in 2024 so far. Earnings have been generally strong and as noted above participants seem quite convinced that central banks including the RBA will start to cut rates by summer at the latest. Australian Gas Light Co has been among the best performers in the last few days after better half-year profits, but 8 of the 12 shares with market caps above $30 billion are up so far this year, some significantly, like Fortescue and Goodman at 26% and 34% respectively.

It might seem challenging for the price to push significantly higher without a clear driver from monetary policy or the next earnings season, though. 7,665 on 2 February was a record closing high, and with momentum lower in February so far a consolidation might be more likely than a breakout upward. The price is close to overbought based on the slow stochastic although the uptrend is still valid. Waiting for a possible retracement lower before entering might suit medium-term traders.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.