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Market alert: Australian dollar struggles after 50bps RBA rate hike

Australian dollar struggles for direction as the RBA issues a 50bps rate hike and risk-on sentiment tilt may be narrowly AUD-supportive in the immediate term.

Source: Bloomberg

The Australian dollar was relatively little-changed – limping a bit higher but struggling to sustain any significant momentum – as the RBA lifted the target cash rate from 1.85 to 2.35 percent. AUD/USD erased some of its earlier intraday losses, but a convincing rally did not appear to materialize in earnest.

Economists’ median forecasts favored a 50bps rise ahead of the announcement. At the same time, futures markets fully priced in a standard 25bps rise while signaling a 69 percent chance – that is, a better-than-even probability – of getting double that.

The market-implied three-year policy curve has been little-changed since the RBA convened in early August. That seems to underscore the muted reaction to an outcome that was seemingly well-anticipated, and which does not appear to materially change the markets’ outlook for the near-term policy path from here.

Traders now expect the RBA to bring the cash rate to 3 percent by the end of 2022 and continue to increase borrowing costs next year. The tightening cycle is seen peaking at about 3.8 percent by the middle of 2023, with a pause thereafter until the calendar turns to 2024.

AUD/USD five-minute chart

Source: TradingView

The Aussie has not been especially responsive the RBA rate announcements over the past year, with an average price change of less than 0.1 percent in the 30 minutes after decisions were announced. Notable exceptions of sizable swings between 0.5 and 0.8 percent were recorded on just 3 out of 12 occasions.

Rather, broad-based swings in market-wide risk appetite have appeared to be a lot more influential on the sentiment-sensitive currency. Indeed, the 20-day rolling correlation between an average of AUD’s value against its top counterparts and the MSCI World Stock Index now stands at 0.70.

That may translate into a narrowly supportive picture in the immediate near term. Bellwether S&P 500 stock index futures are pointing convincingly higher as US bourses prepare to reopen following the Labor Day holiday, which kept them shuttered Monday.

Still, overall positioning still appears to favor a downside bias. AUD/USD is digesting after testing support near 0.6565, following a break below the long-standing range bottom at 0.6837. A further downside push may target the swing bottom at 0.6678. A retest of 0.69 seems necessary to neutralize selling pressure.

AUD/USD eight-hour chart

Source: TradingView

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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