The Reserve Bank of Australia announces its policy decision on Tuesday at 04:30 GMT. Australia’s currency was on the verge of collapsing Thursday owing to fears of an impending European financial crisis and a weakening in China’s economy. Even if the domestic economy is strong, it’s difficult to imagine the RBA will hike rates recklessly in the face of China’s economic crisis.
Will the RBA raise rates or not?
A 15-basis-point rise in the Australian cash rate is all but guaranteed for next week’s meeting, according to the futures market, and with the inflation report suggesting that the central bank may be ‘behind the curve’, they may feel driven to act. How much higher will the RBA’s cash rate be if they do move? There are two options: 15% to 0.25%, or 40% to 0.50%.
However, the former will just confirm what the market has already priced in, while also sending a signal that the RBA appears to be moving more quickly than expected before the release of the inflation report. Having said that, larger rate hikes have already been priced in for the future, making it difficult to see much upside for the Australian dollar in this regard at this point.
As a result, there are two possibilities which will have a significant response. The first is that a 40-basis point rate hike will assist to support the Australian dollar, although the momentum may be moderated by more negative risk sentiment if this is indeed the case. The second option is that the RBA decides to postpone the decision until June, which will most likely have a minimal impact on the aussie.
Two out of Australia’s main four banks predict that the benchmark cash rate will be raised next week, with a third predicting that the likelihood of an increase will increase following Wednesday’s unexpectedly high inflation data.
Inflation surprises earlier in the week
Australian inflation hit 5.1% in the first quarter, leading to speculation that the Reserve Bank may panic and hike interest rates more quickly. The RBA has already delivered a quarter-point rate increase, and markets forecast another nine before the year is over.
In any event, investors are more anxious about Chinese stock market lockdowns and falling stock markets than they are about the Reserve Bank of Australia’s (RBA) rate hikes, which have already been factored into their valuations.
Aussie turns higher after 11-week low
Against the US dollar, the aussie is currently holding above the eleven-week low of 0.7074 that posted earlier in the day. If the RBA doesn’t bring forward its rate hike, a move back towards the 0.7050-0.6990 area is very possible ahead of the 18-month low of 0.6965.
In the bullish scenario, aussie/dollar could make a push up towards the 0.7165 resistance before attempting to reach the 200-day simple moving average (SMA) at 0.7287. Even higher, the market could meet the 0.7457 hurdle.
All in all, if there is a drop below the 18-month low, the market will switch to bearish in the medium-term.
