Australian dollar boosted by surprise RBA hike to 0.35%. Where to for AUD/USD?

The Australian dollar found support after the RBA raised the cash rate target to 0.35%, an increase of 0.25% from 0.1%. The market had anticipated a move of 0.15%, although several analysts scoped out 0.25% or possibly 0.40% in the aftermath of accelerating inflation.

A move of 0.25% is seen as neutral, against the backdrop of the current federal election campaign. Moving rates by 0.25% has been the standard measure since the inflation targeting regime was mandated in 1993.

The Aussie rallied into the RBA announcement as exporters spent the morning buying AUD toward 0.7090 in anticipation of a hike. It raced up to 0.7140 immediately after the announcement and has since settled back toward 0.7100.

The larger-than-expected bump in rates is hot on the heels of a blistering CPI number last week.

In the statement released immediately after the decision, high inflation combined with evidence of wage growth led to the RBA saying, ‘it is appropriate to start the process of normalising monetary conditions.’

Speculation will now begin to grow on what level the cash rate needs to be to provide normal monetary conditions. In any case, more rate rises are coming, the speed and scope of which is up for debate.

The RBA anticipates headline inflation to hit 6% by the end of this year. With this in mind, they said, “This will require a further lift in interest rates over the period ahead.”

For the Aussie, this may lend near term support, but the Federal Reserve will be making a decision for US rates on Wednesday. A 50 basis-point hike is expected and could see US dollar strengthening resume its recent trend.

According to data from the Depository Trust and Clearing Corporation (DTCC), there is over AUD 1 billion of option expiries with a strike at 0.7100 between now and next Monday.

The delta hedging of these options could see unusual price action. Depending on how much naked exposure there is, 0.7100 may act as somewhat of a magnet for the price.

The week ahead in Australia will see retail sales on Wednesday, followed by the trade balance and building approvals on Thursday.

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