Forex Market: AUD/USD rebounds as RBA raises cash rate to 10-year high, flags further tightening

AUD/USD recouped part of yesterday’s losses on Tuesday, after the Reserve Bank of Australia lifted its cash rate to a decade-high and stuck with guidance of further policy tightening, while quashing any view it was nearing a hike pause.

The RBA raised its cash rate by 25 basis points to 3.1% at its December policy meeting earlier on Tuesday, in line with market expectations.

The central bank had delivered a total tightening of 300 basis points in the past eight months, while taking borrowing costs to their highest level since November 2012.

The RBA also flagged more interest rate increases in the period ahead and again noted policy was not on a pre-set course, as the size and timing of future rate hikes will continue to be determined by the incoming data.

The RBA Board noted monetary policy acted with a lag and the full effect of rate hikes was not yet felt.

The Board also stressed inflation in the country was still too high. CPI inflation is now expected to peak at around 8% in 2022 before easing next year and falling to just above 3% in 2024.

“We still think that the RBA will want to see solid evidence that inflation is slowing rather than just plateauing at very high levels and it will take a few more months for that evidence to accumulate,” Marcel Thieliant, senior economist at Capital Economics, was quoted as saying by Reuters.

“The upshot is that we expect the Bank to hike rates to an above-consensus 3.85% by April, though we expect a sharp slowdown in GDP growth and inflation to trigger renewed rate cuts from end-2023.”

As of 9:56 GMT on Tuesday AUD/USD was edging up 0.30% to trade at 0.6717. Yesterday the major Forex pair came off 0.6851, its highest level since September 13th.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -129.1 basis points as of 9:15 GMT on Tuesday, up from -138.0 basis points on December 5th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6745
R1 – 0.6803
R2 – 0.6909
R3 – 0.6967
R4 – 0.7025

S1 – 0.6640
S2 – 0.6581
S3 – 0.6476
S4 – 0.6370