Australian Dollar: RBA expectations support Aussie against US Dollar – Commerzbank

Commerzbank’s Norman Liebke notes that rising RBA rate expectations have lifted the Australian Dollar (AUD), with markets now pricing a high probability of a hike by year-end. Upcoming inflation data will be key for AUD/USD, while the bank’s economists expect the RBA to stay on hold and see relative policy versus the Fed continuing to support the Aussie in the near term.

RBA pricing and inflation risks

"Yesterday, the Aussie has received further support from a significant rise in interest rate expectations, pushing AUD/USD to its highest level since late September. The trigger for the higher rate expectations was comments from RBA Deputy Governor Andrew Hauser. He described the inflation outlook as “materially worse” than the RBA had previously expected and at the same time warned of a potential de-anchoring of inflation expectations."

"Markets therefore reacted strongly to Hauser’s comments. For the upcoming meeting on 3 November, a rate hike is now priced in with a probability of around 55%, compared with just 24% the previous day. By year-end, the cumulative probability of a rate hike priced into the market stands at around 90%."

"This makes the inflation data due on 28 October all the more important. In its August forecasts, the RBA had already expected headline inflation to fall to 3.6% and trimmed-mean inflation to 3.3% by December."

"The upcoming data should at least provide indications that inflation is indeed moving in that direction. If price pressures remain similarly elevated or even intensify, however, this would validate the recent rise in rate-hike expectations and cement the risk of another rate move at the RBA’s meeting on 3 November."

"For now, we continue to expect the RBA to leave its policy rate unchanged."

"Nevertheless, we see further upside potential for the Aussie in the near term. While a reversal of the recent sharp increase in RBA rate-hike expectations could initially weigh somewhat on the AUD, this is counterbalanced by the fact that our economists also expect fewer Fed rate hikes than are currently priced in by the market. From a relative monetary policy perspective, the Aussie should therefore continue to receive support for the time being."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)