AUD: RBA signals pause after delivering fifth rate hike

The Australian dollar has underperformed overnight following the RBA’s latest policy meeting. It has resulted in AUD/USD and AUD/NZD falling back below 0.7000 and 1.2400 respectively. The Australian dollar has weakened modestly after the RBA signalled that they are planning to pause for their rate hike cycle after delivering the fifth rate hike this year lifting the policy rate up to 4.85%.  The decision to hike rates overnight was split 6-3, and the accompanying policy statement omitted the reference that the RBA was willing to hike further if needed, a line that has been included in each statement since June. In the press conference RBA Governor Michele Bullock provided further guidance by stating that “I’d not be interpreting this as saying we’re not going up. I wouldn’t be interpreting it as saying we definitely are going up” when asked a question on why they omitted the reference to be willing to hike rates further. She finished by adding that “we’re basically preserving our options”.

While she has not completely ruled out the possibility of another hike, there is a higher hurdle for another hike which fits with our view that the policy rate is now close to a peak. We expect the RBA to keep rates on hold in December, and then the following policy meeting is not until 9^th February giving the RBA more time to assess how the economy is responding to higher rates and whether further hikes are needed to bring inflation back towards target. RBA Governor Bulluck emphasized that the impact of the latest rate hikes on the economy have yet to be felt stating “the last couple haven’t even started to flow through yet”. Financial conditions are now judged as “restrictive”. She sees evidence that tighter policy is already weighing on demand which is starting “to slow relative to supply, and ultimately it’s going to come back into balance”. Nevertheless, the RBA is still concerned about upside inflation risks. the updated statement highlighted that the RBA now expects inflation to remain above 3.0% for the coming year and believe that there is “an increasing risk that higher inflation expectations will become embedded”. The RBA’s updated forecasts showed underlying inflation returning to their target band about six months later than assumed back in August. Overall, today’s policy update strikes a more cautious tone over the need for further RBA rate hikes that would lift the policy rate above 5.00%. The RBA rate pause has weighed on the Aussie overnight, although the yield pick-up in Australia is still attractive given their position as the highest amongst the G10.         

AUD HAS BEEN CONSOLIDATING AT STRONGER LEVELS

Source: MUFG Research, Macrobond, Bloomberg

USD: Renewed optimism over US-Iran talks ahead of US mid-term elections

The US dollar has continued to trade on a softer footing at the start of this week with the dollar index closing lower for the fourth consecutive day yesterday. The US dollar was undermined both by the sharp move lower for the price of oil and the continued correction lower for US AI-related equities. The price of Brent dropped sharply by around USD10/barrel encouraged by media reports over the potential for US-Iran talks. It was reported that Iran’s President Masoud Pezeshkian said his government has been granted more authority by the country’s supreme leader to pursue peace talks. The state-run Islamic republic News Agency cited Pezeshkian as stating “we are striving to resolve the issue through dialogue and, in this regard, the supreme leader has also granted certain powers to the government”. The Iranian president didn’t clarify the extent of the new authority or whether it signals a broader shift in their negotiating strategy with the US.

At the same time, President Trump told reporters yesterday that “they want to make a deal, and that it could happen”. Vice President JD Vance separately told reporters that “we’ve had good conversations with the Iranians” and that “the president and I both feel pretty good about the prospects of potentially coming to a negotiated settlement”. While it remains highly uncertain whether a deal can be reached, yesterday’s price action does highlight the potential for a sharp move lower in energy prices if there is further positive progress. The case for a stronger US dollar would diminish if the energy price shock started to fade. At the same time, the outcome from the US mid-term elections today could also put a temporary dampener on US dollar upside. According to the final set of polls from the New York Times, and Siena University, the Democrats have moved ahead in almost all of the seven battleground states (Michigan, Texas, Maine, Ohio, Kansas, Alaska & Iowa) that will determine control of the Senate.