RBA April preview and what's next for the AUD/USD?

The backdrop

The RBA commenced the current rate hiking cycle in May last year to tame spiralling inflation and to cool a tight labour market. Since then, the RBA has delivered a cumulative 350 basis points of rate hikes, including four consecutive 50bp rate rises between July and September.

RBA cash rate

What is expected?

The Minutes from the RBA's March Board meeting noted that it would be appropriate for the RBA to pause its rate hiking cycle "at some point" to assess the effects of prior rate hikes.

As part of its considerations, it said it would closely watch incoming employment, inflation, business surveys and retail sales data.

The latest updates of those criteria showed:

• Employment data (released in mid-March) was stronger than expected
• Consumer confidence remains soft at GFC levels
• Business confidence is softening
• The Australian Composite PMI fell in March to 48.1 vs 50.6 in February
• Retail Sales are down 1.5% over the three months to February
• The Monthly CPI Indicator in February rose 6.8%, falling further from 8.4% in December, suggesting inflation has peaked.

The softer-than-expected data has the rates market confidently pricing in a pause at Tuesday's meeting, which would allow the RBA time to assess the impact of its 350bp hike.

However, the forecasting community is divided and notes that while the data is slowing, it remains elevated. It would be premature for the RBA to pause its rate-hiking cycle and its fight against inflation is not yet won.

In our opinion, tipping the balance in favour of a pause is the uncertainty of March's banking crisis, which will see credit conditions continue to tighten and in turn, will play a part in containing demand and inflation.

Notably, the interest rate market has called the RBA rate hiking cycle much better than the forecasters and due to this, we believe the RBA will keep interest rates on hold at 3.6% and note that future moves depend on the incoming data.

How will the AUD/USD react?

The AUD/USD is fully priced for the RBA to keep rates on hold on Tuesday at 3.60%. Should the RBA surprise the market and raise rates, it would likely provide the currency with a boost.

In this case, should the AUD/USD break above the resistance layer at .6750/85, which includes the 200-day moving average and a series of day highs in March, it would allow a more constructive picture to emerge with scope back towards .6900c.

However, while the AUD/USD remains below .6750/85, which is our base case, the risks remain on the downside, initially towards .65c.

AUD/USD daily chart

1. TradingView: the figures stated are as of April 3rd, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation