The day before yesterday, the RBA issued a warning that "a further increase in interest rates cannot be ruled out", prompting traders to scale back rate-cut bets.
That is despite inflation in Australia slowing and the RBA’s forecasts showing it returning to the 2–3% target in 2025, even based on an assumed lower interest rate.
Inflation is expected to fall back into the target band next year, with the RBA's forecasts based on an assumed cash rate of 3.9% in December this year, compared with the current 4.35%. As a result, to resume tightening it’s required to resurge prices.
Compared with other G7 countries, in Australia the ratio of inflation to the current interest rate is the highest, so the RBA has stronger reasons to maintain its tight policy than the central banks of other developed economies.
The most contrasting country to Australia is Canada, in particular the Bank of Canada seems to be positioning itself for a rate cut in the second quarter even if inflation is still around 3%.
Canada's central bank has increased its key rate 10 times in a year and a half to a 22-year high of 5%. It has held the rate constant for its last four meetings. The Bank of Canada's next monetary policy announcement is in March.
"As inflation comes down, we gain more assurance that we are headed back to the 2% target, then we can talk about cutting interest rates," Bank of Canada governor Macklem said this week.
Based on the contrasting sentiments of the two regulators, it could be assumed that the AUDCAD currency pair has grounds for medium-term strengthening.
The final recommendation is to buy AUDCAD with a target at the level of 0.8890. The possible loss could be fixed at 0.8640.
This content is for informational purposes only and is not intended to be investing advice.
