Caution about further tightening weakens Australian currency

07 November 2023 93
Caution about further tightening weakens Australian currency

The Bank of Canada raised interest rates today, which was an expected move. At the same time, representatives of the bank said that there were more serious obstacles to further tightening, that pushed the currency lower.

The Reserve Bank increased its interest rate to a 12-year high of 4.35%, a decision predicted by 29 of 32 economists surveyed by Bloomberg.

The RBA and the Bank of Japan were the only major developed central banks expected to take action in the next six months, while actions by the remaining central banks from the major ten economies were suspended or even halted.

“The board judged an increase in interest rates was warranted today to be more assured” of inflation returning to target, Governor Michele Bullock said in her post-meeting statement. 

 “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

The RBA's easing bias towards policy tightening has caused the Australian dollar to fall. Traders cut bets on a rate hike in 2024 to around 50% from 60%.

"The market at today's meeting was assessing not only the rate hike but also the chances of another rate hike in this cycle," said Saxo's Asia-Pacific market desk.

"The RBA statement did not confirm this hawkishness, as a data-driven approach was adopted."

The central bank's decision to end a four-meeting pause followed stronger-than-expected inflation data, suggesting the central bank still has more work to do to rein in prices. Australia has tightened at a slower pace than global counterparts, having raised rates by 4.25 percentage points, compared with 5.25 points in New Zealand and the US.

The RBA's slower pace reflects its efforts to ensure a soft landing for the economy. The RBA still believes inflation will hold above the 2-3% target in 2025, allowing opportunities for further tightening, while the Federal Reserve is expected to cut rates next year and recent U.S. data show rising unemployment.

While the RBA’s central forecast is for inflation to continue to ease, “progress looks to be slower than earlier expected,” Bullock said, adding that the Consumer Price Index is now estimated to be around 3.5% by the end of 2024 and on top of the target by the end of 2025.

Data on the economy has been mixed lately. The housing market has rebounded to near record highs, retail sales rose by more than anticipated, and business confidence is still proving resilient. Also helping the economy is surging population growth that’s boosting demand for everything from housing to transport and dining out.

On the flip side, consumer sentiment is in the doldrums while the country’s tight labor market is beginning to show signs of loosening, with economists predicting the jobless rate will soon rise from the current ultra-low 3.6%.

The outcome is a more restrained and measured policy of further tightening, which will have a downward impact on the national currency, in particular the AUDCAD. The technical target for the AUDCAD pair is the level of 0.8750.


Overall Recommendation is to sell AUDCAD.

Take profit at 0,8750. A stop loss could be set at 0,8950.

This content is for informational purposes only and is not intended to be investing advice.

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