RBA: AUD soars as inflation forces the RBA’s hand

The RBA hiked by 25bps and increased interest rates to 0.35bps on Tuesday.

Prior to the RBA meeting on Tuesday, we had been considering the prospect of a weaker GBPAUD. The RBA had so far avoided hiking interest rates as the RBA board was uncertain about the extent to which inflation was going to stick. One aspect the RBA board had said it wanted to see was inflation in the wage data. Now the wage price index is in released the middle of May, so the fact that the RBA hiked before that date is a strong message. The RBA is now acting to control inflation.

The two main reasons the RBA hiked in their own words:

1. The economy has been ‘very resilient, unemployment is low and economic growth is expected to be strong this year’.

2. The second reason is that ‘inflation has picked up more quickly, and to a higher level than was expected and there is evidence that labour costs are increasing more quickly’.

The RBA also picked up on a very important point, namely that many households have more debts than previously and that many households have ‘never experienced rising interest rates’. This is a pain area that people will not want to go and many central banks are going to have to hike rates rapidly to contain inflation, but have to remember that going too fast may inflict too much pain, too quickly.

RBA’s governor lowe comments post the RBA meeting

Governor Lowe reinforced the message of the statement post the meeting.

• He expects further interest rate increases will be necessary for the months ahead.

• He has an open mind about how fast rates need to increase. He sees a more normal level of interest rate to be 2.50%.

• Governor Lowe does not preclude a bigger or smaller rate move in the future.

The takeaway

It is reasonable to expect AUDCAD gains from here as the CAD looks close to peak bullishness. Stops can be placed as outlined below.

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