RBA Meeting Minutes continue to point to a slowing of RBA rate hikes and what next for the AUDUSD

The focus this morning for local markets has been on the RBA Board meeting minutes for September and on possible clues as to the Board’s view around the pace of future interest rate hikes.

Heading into the release, the interest market had about ~32bp priced, indicating a 74% expectation of a 50bp rate increase to 2.85% when the RBA next meets on the 4^th of October.

A fair reflection of the divide between those looking for the pace of rate hikes to slow to 25bp in October vs those looking for a fifth consecutive 50bp rate hike.

The RBA minutes noted the Board debated the merits of raising interest rates by 25 basis points or 50 basis points before opting for 50bp. 

“Given the importance of returning inflation to target, the potential damage to the economy from persistent high inflation and the still relatively low level of the cash rate, the Board decided to increase the cash rate by a further 50basis points.”

Reiterating the dovish tilt at the September meeting, the RBA noted that while it expects to increase rates in the months ahead further, “it is not on a pre-set path given the uncertainties surrounding the outlook for inflation and growth,”

Reflecting the lagging nature of changes in monetary policy and the difficulties of taming inflation while keeping the economy on an “even keel”, the RBA noted that

“The full effects of higher interest rates were yet to be felt in mortgage payments, and the broader effects on activity and inflation would take some time to be apparent.”

Our base case, as outlined here in early August, is for a 25bp rate hike in October, which would see the cash rate rise to 2.60%, into mildly restrictive territory before year-end.

The RBA is likely to pause then to allow time to assess the full impact of the rate hiking cycle on inflation, growth, and labour market data.

What next for the AUDUSD

Last week the AUDUSD made a fresh two year low at .6670 on risk aversion and expectations the Fed will continue its aggressive rate hiking cycle into year end to tame stubborn inflation. 

Post the release of the RBA meeting minutes the AUDUSD is trading slightly firmer at .6730, on profit taking ahead of Thursday’s FOMC meeting and after the AUDUSD again tested and held support overnight .6680 area.

.6680/60 remains the key pivot/support for the AUDUSD, and if it were to see a sustained break below here, it would open a move towards the .6500/6300c region.

Source Tradingview. The figures stated are as of Sep 20^th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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