Forecast for the Australian Dollar: Bearish

• The relative rate adjustments last week caused the Australian Dollar to decline.

• Compared to the Fed and BoE, the RBA’s most recent rate boost was insignificant.

• If China reopens, the RBA’s approach to CPI may be put to the test.

After the Reserve Bank of Australia (RBA) increased the cash rate target last Tuesday by 25 basis points (bp), as expected, to 2.85% from 2.60%, the Australian Dollar fell.

Some economists had hoped for a 50 bp increase. The shift away from aggressive monetary policy tightening has, among other things, widened the interest rate differential in the US Dollar’s favor.

The Federal Reserve and the Bank of England raised their Fed funds rate targets by 75 basis points on Wednesday and Thursday, respectively.

The ‘big dollar’ side of the equation began to sway due to the Fed rate hike, causing some volatility in AUD/USD. There had been expectations for calming the ultra-hawkish tone in addition to the widely expected 75 bp increase.

As a result, the US dollar dropped shortly after the rate rise and before Fed Chair Jerome Powell reached the podium. The market should not be expecting any lessening of the strong hawkishness observed so far, he said, and as a result, the USD gained modest gains.

Most of the information from the post-meeting media release was confirmed by the RBA in its quarterly Statement on Monetary Policy, which was issued on Friday. In other words, they anticipate inflation to reach 8% this year, up from 7.75% (now 7.3%), before declining the following year.

As a result, they predict that the cash rate will reach 3.5% in the middle of 2024 before declining. They nevertheless kept the customary warnings on incoming data, of course.

The probability that pricing pressures would be stickier than expected might be a headache for the RBA. Due to this, they may have to raise the cash rate even more or maintain it higher for a more extended period.

Although we will receive an update next month, Australia’s growth is still strong, and its jobless rate is still close to historically low levels.

While the RBA has slowed, other central banks continue to front-load their rate increases. They said they thought mortgage holders had fully absorbed the effects of the interest rate rises.

There was a growing impression of anaemic global economic prospects heading into the weekend. This was primarily based on lockdowns in China connected to COVID-19 hurting the second-largest economy in the world.

Then, late on Friday, a rumor that China is contemplating loosening these limitations surfaced, linked to a Twitter conversation. The idea sent all China-related assets into a frenzy, with Hong Kong’s Hang Seng Index (HSI) rising by more than 8% for part of the day.

A limited amount of Australian data will come out in the near future. A speech by RBA Deputy Governor Michele Bullock on Wednesday may also draw some attention to building permits.

With their midterm elections on Tuesday and inflation statistics on Friday, the US might see some activity.