Published: February 8th, 2023
The Australian Dollar held its place as the best-performing G10 major for the new year-to-date, despite gains by many of its peer currencies for a second successive session.
On Tuesday, 7th February, GBP/AUD reversed all of last week's loss and neared its 200-day moving average of 1.7544. Analysts at the Commonwealth Bank of Australia (CBA) think the pair could potentially reach as high as 1.7789 if the Reserve Bank of Australia (RBA) says that this week’s expected hike to the cash rate will be the last in the current cycle.
‘AUD/GBP might test downside support at 0.5619 by mid-week if traders wind back their expectations for additional tightening,’ wrote Commonwealth Bank of Australia’s forex strategy unit in a Monday analyst note.
‘We believe AUD/GBP is trading near fair value and we’re looking for the pair to hover around the current level for most of this year.’
Investors are looking for the RBA to post its ninth increase to the cash rate since April 2022 this week, with an uptick to the benchmark of 25 basis points, or 3.35 per cent before another rate hike potentially arrives in March.
The consensus forecast points the central bank ready to raise the rate again next month, with some prospect of another 25-basis point rise, bringing the cash rate to 3.6 per cent in March, if it happens.
"The indicators we’ve seen in Australian domestic economic data over the past 30 days or so have been up and down. Labour figures for December 2022 disappointed as employment fell, surprising most analysts,’ said CBA in its analyst note.
‘A surprisingly strong print for fourth-quarter CPI inflation, paired with a plunge in December retail sales suggests the current cost-of-living crisis in Australia is deeply embedded.’
In early March 2022 the Aussie (AUD) was up against the Euro, Dollar, and British Pound as 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 February policy meeting suggested interest rates could rise as quickly as April far earlier than the central bank had been signaling since the start of the year.
In fact, it was just in February 2022 that RBA Governor Phil Lowe told The South China Morning Post that the bank was ‘being patient’ on interest rates ‘in a way that markets with much higher rates of inflation simply can’t.’
After that, inflation Down Under started steadily rising and the RBA was clearly spooked. The bank’s February 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 were set to be released. Consensus was 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, ‘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 wanted to see upcoming data on both labour costs before and inflation before lifting interest rates, suggesting the most likely date as late April.
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 was ‘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 an RBA rate hike rose steadily through 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 Barclays 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.’
AUD remained one of the best performing majors of 2022 and analysts expected it to remain buoyant, particularly after news that China was set to inject fresh stimulus into its economy.
Authorities in Beijing were responding to a sustained growth slowdown and announced in February 2022 that further support for Australia's biggest export market was on the way.