Australian dollar plunges toward two year low before RBA hike

See the latest Australian dollar analysis here:

Macro Afternoon

Today’s meeting by the RBA, where everyone and his dog is expecting a solid 0.5% or 50 basis point hike, is not going to save the beleaugured Australian dollar.

First, the wonks at ING rationale for the big five oh:

  • the inflation expectations data, (with a) 6.7% print in the latest release, should have banished any thoughts of a lesser hike or even no hike at all.
  • The other factor to consider is that with the latest inflation rate at 5.2%, and probably higher when we get the 2Q figure on 27 July, at 0.85% the RBA cash rate target is well off where it needs to be to even remove stimulus from the economy, and even further away from actually starting to restrict growth and bring inflation down.
  • So it has to be at least 50bp.

Of course the best thing to arrest inflation is to make two thirds of all households mortgages (borrowers and slumlords) more expensive, thus pushing workers to ask for more for wages to cover the shortfall? The macro outlook is more opaque still with a slowing China, a pullback in iron ore prices, stubbornly high energy prices and a probable US recession around the corner.

The RBA does like to play catchup, usually late and well after they’ve been invited to the game, so “normalising” rates quicker than expected is nothing new for the boffins at Martin Place.

But for the technical picture on the Aussie, its all downhill, with the weekly chart looking through the usual 200 pips a month volatility that many market economists seem to forget about when analysing the Pacific Peso. Its currently at the bottom of its trend channel, so a bounceback towards the mid zone at the 70 handle is not unlikely at all in the reaction to a 50 bps hike by the RBA:

 AUD weekly

But perspective matters and switching to the monthly chart shows how the post COVID bounce is now rolling over like a dead cat, with an inverse relationship to the cash rate:

AUD monthly

With the Federal Reserve (currently at 1.5 to 1.75%) looking to add nearly 200 bps in rate hikes before the year is out, the RBA is way behind,  even with the 50 points added to make it 1.35%, which will not give the Australian dollar any relief past the temporary volatility.

  • Aussie dollar approaches the July RBA meeting with mostly headwinds, and a significantly weakened link between domestic monetary policy dynamics and AUD/USD suggests that a rebound towards the 0.7000 mark is unlikely to materialise soon even in the event of a hawkish surprise by the RBA (markets are not fully pricing in a 50bp hike).
  • The size of RBA tightening likely has implications for FX only beyond the short-term, and in an environment where markets feel more comfortable with their pricing of a global slowdown and see the peak in rates, which could fuel a stabilisation in global risk sentiment and re-connection between short-term rate dynamics and FX. From this perspective, a more aggressive RBA tightening can suggest a wider room for AUD/USD recovery towards the end of this year and the start of next year (assuming that’s when market sentiment begins to recover), but a number of other factors – especially related to China’s demand and the USD outlook – will continue to be playing a big role too. All this makes any consideration about the AUD outlook purely based on rates dynamics still reductive.
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Comments

  1. I don’t get all this talk of “normalising rates” when the economy clearly isn’t in a normal state. (and that’s before I consider the abnormal levels of debt).

    • AnnualizeTHIS

      And there is no such thing as “normal” levels of rates as markets never stay in equilibrium. Especially in this chaotic and unpredictable time. It’s all very exciting as an observer.

    • GonzificusMEMBER

      The economy is abnormal because of the ultra low interest rates. The zombie & untenable companies need to be allowed to fail; this propping everything up with ultra low rates is like giving every school child a participation trophy, its not the way the world works, nor should it be, and it ultimately causes problems down the line.

      • ‘like giving every school child a participation trophy, its not the way the world works’
        Oh yes it is, started about the time rates started really heading downwards, funnily enough

  2. Jumping jack flash

    0.75 today.

    And then a full 1% sometime between now and the end of the year. Maybe November?

    And still inflation will continue to rocket away because the inflation is being driven by that massive, massive wad of stimulus that all the countries curiously plonked into the economy recently… for COVID… yes, yes, of course… COVID. Because COVID required a few trillion dollars of global stimulus, and then announcements about “transitory inflation”, and then minimum wage hikes in all developed countries… coinciding with the zero interest rate bound being hit by everyone at roughly the same time.
    But there’s nothing sus about that, noooo.

    But even once they manage to absorb or redistribute all those trillions of stimulus dollars currently swimming around in the global economy, there’s also the looming problem of the oil and gas supply as winter approaches, and probably food, which will cause massive price increases as supply is constrained and demand ratchets up.

    A problem that raising interest rates cannot possibly solve, but in fact exacerbate the pain.

    • They should do 75 today
      Could they copy the FED
      You’d never know
      My guess they know they are way behind
      Should be 75 in July & Aug then see

    • kiwikarynMEMBER

      And when millions of people in poor countries starve or freeze to death, the world shall collectively shrug their shoulders and not give a flying rats, because you know, they’re poor and none of their leaders ever get invited to swanky European junkets where they can swap jovial covid stories about what heroes they were and flash their resumes around for UN jobs for when the desperate populace boot them out of office. Let them eat cake they said…

        • kiwikarynMEMBER

          Even that will probably be too much effort – maybe a TikTok video of some famous people singing “We Are The World” over Zoom.

      • Already been happening in Syria, with our support, kiwikaryn, freezing as it’s oilfields are held by USA and oil trucked out to Turkey, and starving as it’s grain is also confiscated and trucked out. To have Aramaic church’s stripped and beautiful cities bombed to rubble like Raqqa is not enough, sanctions and grabbing ships making compassionate oil deliveries keeps it going. Even prosthetics imports are sanctioned by the west. Bombs blow limbs off kiwikaryn.

  3. Finance MessiahMEMBER

    It appears we are heading towards a recession. Most of us agree that interest rates need to rise, but if the RBA pushes too hard, it won’t bring down inflation. We only have to look at what is happening in New Zealand. Their central bank acted way earlier than we did. They’ve been hiking interest rates and barely a dent in inflation. It’s almost as if inflation is being caused by something else. How about that?

    It’s obvious how this is all going to play out. Central banks know that most developed economies will tip into recession late 2022, early 2023. Interest rates are coming up so central banks have another lever to pull when things get bad. Rates are increasing just to come back down when things get bad. It explains the urgency and aggression.

    The RBA is too stubborn, slow and moronic to admit that no matter what they do, inflation is going to spiral out of control just like it is everywhere else. Unless the war in Ukraine sorts itself out and all of a sudden, there is a glut in the supply of semiconductors, gas/grain/oil flows again and China abandons its COVID-zero strategy, inflation is going to get a lot higher than the RBA refuses to admit.

    And yet, the RBA continues to gaslight Australians into thinking we caused this buying 90″ TVs and buying clothes in end of year sales.

      • Yes, however we produce grain and normally are an exporter, plus can just feed ourselves. Sustainable population of 22 to 23 million sure but right now we won’t starve thru lack of food imports. We do have our own energy sources and energy problems are just government policy favouring multinationals and export at cheap rates. Bottom line is bad government management for the last 40 years or so. A good govt could turn Aus around if it had the will.
        If not it’s down the gurgler with the anglosphere and eu.

    • kiwikarynMEMBER

      Everyone is on fixed terms in NZ, so it takes a while for interest rates to flow through the economy. Not like Australia, where most people are on variable and the increase is instantaneous.

    • >> They’ve been hiking interest rates and barely a dent in inflation. It’s almost as if inflation is being caused by something else.

      That’s not really a full picture until you prove that not raising rates meant that inflation wouldn’t be worse. How exactly do you know that the raised rates aren’t having an effect of at least curbing the inflation to be thesame and not increasing?

  4. I’d have to Q that analysis
    FED is going to pivot & our RBA will have a while to go
    AUD 69c this morning
    Feels to me the market is caught short
    I think the AUD will be 80c before 60c let’s see

  5. GonzificusMEMBER

    On Friday evening after dinner I ate a 2/3 of a brownie, after an hour or so I ate the remaining 1/3. A the time it seemed like the sensible thing to do, unfortunately by the 2 hour mark we were getting a bit sketchy, by the 3 hour mark my eyes were focussing independently and veering off in wild arcs and my speech was down to mono syllables. By the 4 hour mark I was in an epic struggle of Homerian proportion to pitch my swag, and shortly thereafter I was unconscious and comfortable in my sleeping bag thankful to have emptied my bladder not long before.
    This is what will happen with the interest rates. Once we have gone too far we will be locked in for the ride & just have to stick it out.
    Never again.

  6. They will stop raising when the impact to the economic prosperity, wealth and full employment objectives are being challenged. We are not there yet, but you can see it over the horizon.

    F%ck the dollar and inflation numbers, that’s just one of the 3 RBA’s mandates. The other 2 are about people.