AUD/USD underperforms as RBA slows pace of rate adjustment

Daily currency update

The Australian dollar underperformed through trade on Tuesday after the RBA surprised market participants by delivering a smaller than an anticipated rate hike. Analysts expected the RBA would issue a 5th consecutive 50 basis point cash rate adjustment, lifting the benchmark cash rate to 2.85%. Instead, policymakers chose to slow the pace of monetary policy tightening proffering a 25-point rate increase. The decision, while hinted at by RBA officials, surprised markets and prompted an immediate correction in the value of the AUD, driving a break below US$0.65. Having touched intraday lows at US$0.6450 the AUD found support amid a general improvement in risk appetite. Equities rallied overnight and the USD fell for a 2nd consecutive session as markets again toy with the idea central banks may loosen financial conditions earlier than currently anticipated. While most major central banks continue to peddle an overtly aggressive monetary policy framework the RBA’s surprise decision, coupled with signs of a slowdown in US economic activity has opened the door to the idea of a broader slowdown in the pace of interest rate adjustment. The improvement in risk sentiment help the AUD climb back toward US$0.65 overnight and our attentions turn now to the RBNZ policy update and US ISM services data. After the surprising downturn in Manufacturing activity earlier this week we anticipate a healthy read as consumers transition away from goods and back toward the service economy. A shock downturn in activity will likely elevate the current narrative and open the door for an AUD upturn.

Key movers

The US dollar suffered a significant decline through trade on Tuesday amid a renewed demand for risk. The DXY dollar index plunged almost 1% in the day with the GBP and Euro leading gains. As is the current trend bad news is good news for equities and risk assets and a massive 10% decline in the US JOLTS job openings report raised calls for a possible correction in the pace of Fed policy adjustment. While the Fed continues to peddle an overtly aggressive monetary policy program signs of a slowdown in US economic activity and labour market strength could provide policymakers the impetus to pause or at the very least slow the pace of policy change. Our attentions turn now to ADP employment data ahead of Friday’s US non-farm payroll print, while ISM services data will prove pivotal in guiding the near-term risk agenda. As consumers transitions away from goods and back to services in the post-pandemic economy, we anticipate a healthy read and instead will look within the report for signals inflation pressures are transitioning. A shift in price pressure into the service economy will prove worrying for the Fed as it battles to control inflation and avoid a recession.

Expected ranges

• AUD/USD: 0.6430 – 0.6580 ▼
• AUD/EUR: 0.6480 – 0.6630 ▼
• GBP/AUD: 1.7350 – 1.7780 ▲
• AUD/NZD: 1.1280 – 1.1420 ▼
• AUD/CAD: 0.8720 – 0.8920 ▼