Market update: Australian dollar ponders path ahead after RBA minutes

RBA leaves rates on hold

The Australian dollar’s grip above 64c is intact after the Reserve Bank of Australia's (RBA’s) meeting minutes were published today. The notes expanded on the commentary in the monetary policy statement that was released at the time of the rate decision on 5 September.

The RBA left rates on hold at 4.10% at the meeting and the interest rate market is ascribing only a low probability of any further hikes in this cycle. It appears that the third-quarter consumer price index (CPI), due to be released on 25 October, is the crucial data point that might shift the needle on the RBA’s thinking around monetary policy.

The RBA has hiked by 400 basis points (bps) since the pandemic lows near zero, while the Federal Reserve has hiked by 525 bps.

Today’s publication of the RBA board’s perspective noted: “The members considered two options for monetary policy at this meeting: raising the cash rate target by a further 25 basis points; or holding the cash rate target steady.

“In weighing up the two options, members agreed that the case to keep the cash rate target unchanged at this meeting was the stronger one.”

Decision driven by concern for China

Overall, the two main competing factors appear to be the concern for the economic outlook for China being weighed against persistently high domestic inflation.

At the time of the monetary policy decision the accompanying statement cited risks around services inflation, the uncertainty around the laggard effects of tighter policy, household consumption and the economic outlook for China given the problems in its property sector. All of these themes received further attention in the minutes.

Consistent with today’s release, the statement from the meeting noted, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”

The meeting was Governor Philip Lowe’s last as leader and he handed the baton over to Michelle Bullock this week.

Bullock has been the Deputy Governor of the bank since April 2022 and has been with the institution since 1985. She has a reputation as a leading economist in her own right. The appointment is mostly viewed as a steady transfer of leadership and her recent remarks point toward a similar approach to that of her predecessors.

Interest rate markets see only a small chance of further tightening in this cycle from the RBA and the Fed. Adjustments in the disparity of monetary policy between the central banks might be a driver for the Aussie going forward.

AUD/USD technical analysis

AUD/USD remains in a shorter-term descending trend channel after rallying last week to retreat back into the recent range. The price has been trading between 0.6358 and 0.6522 for six weeks.

The Aussie remains below the 34-, 55- and 100-day simple moving averages (SMA) and they have negative gradients, which may suggest that bearish momentum is intact for now. Resistance could be at the recent high near 0.6520. Further up, the 0.6600 - 0.6620 area might be a notable resistance zone with several breakpoints and prior peaks there, as well as the 100-day SMA.

On the downside, support may lie at the breakpoints and previous lows near 0.6360, 0.6270 and 0.6170.
The latter might also be supported at 161.8% Fibonacci Extension level at 0.6186.

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