RBA Surprise Rate Hike
The Reserve Bank of Australia hiked its interest rate by 25 basis points today to 3.85 percent. The market was betting 100 percent against a hike.
With inflation cooling, why did Australia hike?
“…inflation in Australia has passed its peak, but at 7 percent is still too high and it will be some time yet before it is back in the target range”.
“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today”.
“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5 percent in 2023 and 3 percent in mid-2025”.
Central bank forecasts are near worthless, but let’s give them the benefit of the doubt. In that case, Australian interest rates are negative and will be negative until sometime into 2024 at current interest rates. If inflation goes higher for any reason, the RBA is well behind the curve.
Consistent with their negative interest rates, the Australian dollar is far weaker than crude oil suggests it should be.
If I’m the RBA, I’m far more worried about that gap closing to the upside with inflation taking off, than I am if crude tumbles to the $40 area implied by the currency AUDUSD exchange rate.
One cross I keep an eye on is AUDJPY. I have a USDJPY target above 200 based on the charts. If that happens, then AUDJPY is a candidate for a breakout. This week’s rate hike combined with the already strong move in USDJPY hints at potential shocker in late 2023 or sometime after.
This trend goes way back and it is similar to USDJPY. This tells me the yen is the main actor here, not AUD. Many investors probably think of AUD and USD as being on opposite sides of macro themes, but this chart tells me there’s potential for a yen-centric move.
A currency such as AUD starts looking like USD with a breakout versus yen, USD also rallying versus AUD, and then USDJPY 200 comes at you quick.
How long could it take for a clear signal? AUDCNY says “not long:”
My bias read puts more weight on AUD breaking higher here because I still expect CNY will decouple from USD and massively depreciate.
KRW is sending bullish signals on USD and contributing to my bearish view of East Asian currencies here. AUD doesn’t look particularly bullish versus KRW though.
Finally, AUDUSD. Imagine AUD breaks down and is relatively strong versus East Asian currencies.
The All Ordinaries looks like the DJIA in the U.S. A little worse with the currency translation via iShares MSCI Australia EWA 0.00%↑ Doesn't interest me for a short, though potentially as a long if I'm wrong about a bear market AND right about AUD outperforming. In the bull market for stocks scenario, AUD has already bottomed. Maybe of interest to bulls.