Published: April 20th, 2022
The Aussie (AUD) was up against the Euro, Dollar, and British Pound this week as London's market reopened after an extended bank holiday and forex traders reacted to signals that an interest rate by the Reserve Bank of Australia may be in the offing.
Minutes from the RBA's April policy meeting suggested interest rates could rise as quickly as 8th June, far earlier than the central bank had been signaling since the start of this year.
In fact, it was just in March that RBA Governor Phil Lowe told Bloomberg that the bank is ‘being patient’ on interest rates ‘in a way that markets with much higher rates of inflation simply can’t.’
Since then, inflation Down Under has been steadily rising and the RBA has clearly been spooked. The bank’s April minutes said yearly core inflation in the first quarter of 2022 would likely exceed its top target of two to three per cent.
The minutes were published one week before the country's official inflation figures for Q1 are set to be released on 26th April. Consensus is looking for headline inflation of 3.1 per cent year-on-year in the first quarter.
‘Inflation had accelerated, and another increase was expected,’ the RBA said in its April minutes, ‘with measures of underlying inflation in the first quarter anticipated to be north of three per cent.’
The minutes highlighted a robust domestic economy, strengthened by rising consumer spending thanks to the passing of the Omicron COVID wave, plus a tightening jobs market.
Rising house prices and an uptick in commodity exports were also highlighted, while members of the bank’s policy committee were in agreement that the RBA’s policy settings were ‘very accommodative’.
Despite that, the minutes emphasized that the central bank wants to see upcoming data on both labour costs before and inflation before lifting interest rates, suggesting the most likely date as 6th June.
Following the release of the minutes, AUD was the best performing G10 currency, posting gains of 0.35 per cent against Sterling, 0.30 per cent against the Dollar, and 0.33 per cent against the Euro (at time of writing).
In a market commentary, forex analysts at Westpac said the RBA Board is ‘devoting more attention to global inflation risks while gauging the responses of other central banks.’ The timetable for rate hikes has been accelerated around the world, Westpac said, and there is concern that markets may be underestimating the inflation challenge.
Markets expectations for a RBA rate hike have risen steadily through most of late 2021 and early 2022, bidding the Aussie higher as a result.
While the RBA was signaling that it was resisting further rate rises, it seems forex traders have called its bluff. A significant number of rate hikes are already being 'priced in' for AUD.
Money market pricing, for example, indicates there are 190 basis points of hikes anticipated from the RBA in the remainder of 2022. Only the Reserve Bank of New Zealand has more price hikes expected.
A Bloomberg survey of forex analysts conducted showed 60 per cent favour a 14 basis points move in June, reversing the 14 basis point cut made in November of 2020.
That could provide ongoing support to the two antipodean fiats for the rest of 2022, but only if the market keeps believing their central banks will lift rates aggressively.
Given that the market is already priced at the top of the current range, the RBA will need to deliver if the Australian Dollar's strong advances will keep going in 2022.
An analyst note from Dankse Bank said currency traders ‘are already pricing AUD hawkishly, and for that reason we don't believe relative rates can provide much long-lasting support for the Aussie.’
Any slowdown in the pace of rate hikes, or signals that hikes will be slow to arrive, could create downside pressures for the currency.
‘We also think the cash rate will reach 124 basis points by November, adds Danske, well below market pricing but more or less above most other forecasts. The RBA minutes suggest traders need to be on the lookout for more indicators over coming weeks, but no one can deny that the Board’s approach to policy has changed.’
AUD remains the best performing major of 2022 and analysts expect it will remain buoyant, particularly after news that China is set to inject fresh stimulus into its economy.
Authorities in Beijing are responding to a sustained growth slowdown and announced earlier in April that further support for Australia's biggest export market is on the way.
Terence Chu of Barclay’s Forex Strategy unit told The South China Morning Post that the prospect of an imminent bank reserve requirement ratio (RRR) cut has increased after the State Council said China will use all monetary tools at its disposal.
The China State Council said it would stimulate economic activity through a cut to the amount of cash banks are required to hold in reserve. Easing that risk management requirement allows them to lend more freely.
The council said that large Chinese banks could slowly lower their reserve requirement ratio, which is the amount of deposits they are required to park with the central bank.
The moves come as Beijing tries to deal with slowing growth created by steep lockdowns imposed due to a renewed COVID surge in recent weeks, most visibly in commercial centre Shanghai.
China's central bank last lowered its RRR in December 2021, just days after the government suggested the easing move was imminent in a State Council session.
That cut released 1.1 trillion yuan (USD 187.60 billion) in liquidity back in into China's banking system.
‘With the scale of economic weakening we’ve seen in China due to covid lockdown, the market not only expects a fast reduction in the reserve requirement ratio, but traders are also looking for the benchmark prime rate for loans be lowered next week,’ Added Chu.
News of stimulus for China's economy normally delivers a tailwind for AUD, as China accounts for the majority of Down Under's commodity exports.