AUDCAD sell remains relevant

Australia’s central bank expects inflation will only return to the top of its 2-3% target by end-2025 and that a stronger economy will support employment, underscoring this week’s decision to resume raising interest rates.

With this decision, the central bank ended a pause of four meetings by hiking the interest rate to a 12-year high of 4.35% in order to try to curb prices.

Inflation remains above 5% by the end of the year, well above target, the central bank noted. Service-price increases are likely to persist for a while due to labor market tightness and rising electricity prices. Rent inflation is also likely to remain high as surging population growth in recent quarters increases demand in an already tight market.

Another factor contributing to inflation is wage growth, which is expected to peak at 4% this year, up from 4.1% forecast in August, and holding at that level through the first half of 2024 before starting to decline.

The RBA highlighted persistently low productivity growth among the risks to inflation. On the other hand, a decline in global cost pressures and moderate inflation in China could bring down overall consumer prices.

According to the quarterly monetary policy statement released today, the Reserve Bank forecasts headline inflation at 4% by mid-2024 versus 3.5% estimated three months earlier, and economic growth at 1.75% from 1.25% previously. Unemployment is expected to peak at 4.25% at the end of 2024 and then remain at that level through the next year.

"The domestic economy has been more resilient than previously expected and, as a result, more gradual easing in the labor market is expected," the RBA said of its forecasts, which are based on an assumed peak in the cash rate at around 4.5 percent. "The prospect of higher inflation in the year ahead increases the risk of incorporating higher inflation expectations in price-setting decisions

Many economists, including those at the Commonwealth Bank of Australia, now predict that the RBA has probably finished raising rates, although National Australia Bank and Royal Bank of Canada are among the few that see at least one more rate hike to 4.6%. Money market bets suggest rates will remain above 4% for the next year.

"The board's priority is to return inflation to target," the RBA said. "Whether further monetary tightening is needed to ensure that inflation returns to target within a reasonable timeframe will depend upon the data and the evolving assessment of risks," said the bank, repeating Tuesday's statement.

At first glance, the new forecasts are hawkish compared to the statements made on Tuesday, which could lead to a series of short-term strengthening in the Australian currency, particularly in the AUDCAD pair.

Evaluating the situation as a whole, in the medium term, it is likely to maintain the assessment on the softening of the Australian dollar and the decline in the AUDCAD pair.

Overall recommendation is to sell AUDCAD.

Take profit at 0.868. A stop-loss could be set at 0.887