AUD/USD: hawkish RBA and China's new budget

Surprising resilience: AUD/USD defies risk-aversion

A notable end to last week saw the AUD/USD outperform, despite a wave of risk-aversion flows that hit the asset market ahead of the weekend. Concerns around higher bond yields and conflict in the Middle East were key drivers.

Hawkish turns: RBA signals and robust data

The AUD/USD's strong performance last week followed a series of hawkish RBA communiqués, initially observed in their meeting minutes released in mid-October, and a string of stronger-than-expected economic data, including:

• In September, the unemployment rate fell to 3.6%, compared to an expected 3.7%
• Q3 trimmed mean inflation increased to 5.2% YoY, versus 5.0% expected
• Q3 PPI rose by 1.8%, compared to 0.4% previously
• Q2 GDP printed at 2.1% YoY, against 1.6% expected
• Retail sales for September increased by 0.9%, versus 0.3% expected
• Rising Q3 inflation data suggests that the RBA may increase rates.

Central banks at a Crossroads: RBA vs Fed

The robust data has heightened expectations that the RBA will raise rates by 25 bp to 4.35% in its next meeting. This potential RBA rate hike stands in contrast to the Fed, which is expected to maintain rates during Thursday's FOMC meeting and provide softer forward guidance, likely keeping rates on hold into year-end.

The China factor

This divergence in central bank expectations between the Fed and the RBA has been reinforced by news from China last week. Reports indicate that the NPC approved a mid-year expansion to its central budget for the first time since the Asian Financial Crisis in 1998.

AUD/USD technical analysis

The weekly candle that formed last week indicates a loss of momentum, suggesting that the AUD/USD is attempting to establish a base at last week's .6270 low.

AUD/USD weekly chart

However, as seen in the daily chart below, there is notable short-term resistance at .6400, stemming from recent highs, and more significant resistance at .6520/.6530 from highs in August and September. The AUD/USD needs to break above both these layers of resistance to confirm that a trend reversal is underway.

AUD/USD daily chart