Aussie dollar slides on dovish RBA signals despite rate hike

RBA hike fails to support Aussie dollar, AUD turns weaker against USD

Despite the Reserve Bank of Australia (RBA) implementing a 25-basis-point interest rate hike for the first time in five months on Tuesday, the Australian dollar continued to decline against its U.S. counterpart. The AUD/USD pair also faced losses due to the positive performance of U.S. Treasury yields, which have supported the U.S. dollar in recovering from a two-month low.

After maintaining a steady benchmark interest rate for four consecutive meetings, Australia's central bank initiated a policy tightening by raising the Official Cash Rate (OCR) from 4.10% to 4.35%. The move by the RBA may be a response to recent Consumer Price Index (CPI) data, which indicated a third-quarter increase, surpassing market expectations. Australia's seasonally adjusted Retail Sales for September also exceeded forecasts.

The RBA has expressed reduced confidence in the immediate need for further rate hikes and is now adopting a data-dependent approach, waiting for more substantial signs of inflation before considering additional increases — a sign that was largely interpreted as dovish, leading to weakness in the Australian dollar. In his morning notes on Tuesday, Markets.com Chief Market Analyst Neil Wilson wrote that “the RBA has tended to lead where other central banks have followed”, meaning that the Australian interest rate hike may be indicative of potential similar actions by other institutions in the coming months.

Although there are doubts about whether upcoming data will prompt additional rate hikes by the RBA, the central bank's concern about persistent inflation risks might discourage early rate cuts in the next year.

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USD rebound: DXY index rises on Tuesday

The U.S. Dollar Index (DXY) has rebounded from its seven-week low, primarily driven by improved U.S. Treasury yields, with the 10-year yield recovering from the six-week low observed the previous Friday.

The DXY has also seen upward momentum following comments from Minneapolis Federal Reserve Bank President Neel Kashkari. In an interview with the Wall Street Journal on Monday, Kashkari expressed a cautious stance toward monetary policy, indicating a preference for tightening policies more aggressively rather than risking not doing enough to align inflation with the central bank's 2% target.

“Undertightening will not get us back to 2% in a reasonable time”, Kashkari said. Inflation could be “ticking up again. That’s what I’m worried about”.

He added that some prices and wages data indicate that inflation could be “settling somewhere north of 2%, and that would be very concerning “.

AUD forecast: Danske sees Aussie at 0.62 in 12 months’ time, Westpac bullish

In their Australian dollar forecast, economists at Danske Bank indicated that they see the AUD to USD rate falling to 0.62 in the coming 12 months:

“The RBA hiked the Cash Rate by 25 bps to 4.35% after four consecutive holds in previous meetings. Its forward guidance was somewhat more dovish than earlier, as the statement no longer indicated that 'further tightening may be required'.

The door for hiking the policy rate is still open, but given the recent tightening in global financial conditions, we think the RBA is likely to remain on hold from here.

We still maintain a downward-sloping forecast profile for the cross in 12M horizon (0.62).”

A recently updated AUD to USD forecast by Australian bank Westpac was bullish on the Aussie, indicating a potential AUSUSD exchange rate of 0.67 by March 2024, 0.69 by September 2024 and 0.70 by December 2024.

At the time of writing on Tuesday, the AUD to USD exchange rate stood at $0.6416, with the greenback gaining over 1.15% against the Aussie on the day, as per MarketWatch data.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.