RBA: Set to take a bullish twist?

In December the RBA kept rates unchanged at 0.10% and the weekly bond purchases were set to remain in place until mid-February. The main takeaway from the RBA was a more optimistic stance where they expected the economy to return to its pre-delta path in the first half of 2022. You can read the initial report on the RBA here as the bank signalled it was past ‘peak bearishness’. Also, the RBA has indicated that it is guided by three principles:

• The function of the Australian bond market.

• The action of other central banks.

• Most importantly progress towards full employment and inflation targets.

Let’s look at each one below.

Employment

At the time the RBA expressed uncertainty about the labour market hitting its target saying, ‘this will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. You can read the full report here from the RBA. Since the RBA said that we have seen a great jobs report. Australian labour data is also out next week, so another good print and the RBA will almost certainly be more hawkish.

The Fed moving

Another criterion influencing the RBA was the action of other central banks. Now that the Fed has penned in at least 3 rate hikes this year this does give the RBA the green light to start looking too.

The bond market

Yields have been moving up across the board as the Fed is expected to take a more hawkish stance this year. So, the bond market is signalling higher interest rates to come.

Commodities higher

Finally, Iron Ore and Coal prices are higher which all support the AUD.

Conclusion

There is a lot of reasons to support further AUD upside over the medium term and this would indicate that the AUD should find some bids out of the next RBA meeting as long as all these factors remain in place.

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