Australian Dollar, AUD/USD, RBA, US Dollar, Fed, Yields, RBNZ – Talking Points
- The Australian Dollar had a look lower with the RBA on hold
- AUD had been lifted prior with yield differentials moving in its favour
- Quarterly CPI on April 26th now moves into view. Will it impact AUD/USD?
The Australian Dollar slipped slightly in the aftermath of the RBA standing still on rates for the first time since May 2022.
The RBA maintained some flexibility and didn’t rule out future hikes. In the accompanying statement on monetary policy, they said, “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.”
Interest rate markets are currently pricing no more hikes and a better-than-even chance of a 25 basis point cut by the end of the year.
Today’s price action comes after a massive rally for the Aussie yesterday. Markets were rattled by the huge surge in crude oil prices after OPEC+ cut its crude oil production target by 1.1 million barrels per day. The move compounded existing tightening supply issues.
This saw Treasury yields slide lower, taking the US Dollar with it. AUD/USD was the largest beneficiary in the aftermath. The yield spread between Treasuries and Australian Commonwealth Government bonds (ACGB) moved back toward favouring AUD which may have played a role in the rally.
The RBA has raised the cash rate by 350 basis points since May 2022. In October 2021 the Australian Prudential Regulation Authority (APRA) released this statement.
“APRA has told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate.”
Previously, the hurdle was 2.5%. Much has been made of the so-called ‘mortgage cliff’ where borrowers will need to refinance their debt of the last few years at current levels. These debts might be near or exceed the upper end of APRA’s expectation of appropriate lending.
This might go some way to explain why the RBA is hesitating to tighten monetary policy while CPI remains much higher than its target of 2–3% over the business cycle.
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Quarterly CPI will be released later this month and it will be only the second time that it can be compared to the new monthly CPI figure that the Australian Bureau of Statistics (ABS) introduced last October.
This new monthly gauge only covers around two-thirds of the basket of goods and services that is counted in the quarterly figure.
The RBA has previously cited the softening in the monthly CPI number as a reason to be less hawkish. Another disparity of 0.6% the wrong way could be a headache for the central bank and could see the monthly read defenestrated.
Looking ahead and across the Tasman Sea, the Reserve Bank of New Zealand (RBNZ) is anticipated to raise its official cash rate (OCR) by 25 basis points to 5.0% tomorrow. The Kiwi made a 7-week high above 63 cents against the US Dollar today.
The RBA’s full monetary policy statement can be read here.
AUD/USD AGAINST 3- AND 10-YEAR AU-US BOND SPREAD
--- Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCathyFX on Twitter
