Australian dollar tries lower after RBA hike by 0.50% so where to for AUD/USD?

The Australian dollar headed south after the RBA further confirmed their alliance with other global central banks on a robust tightening regime.

The bank lifted the cash rate by 50 basis points to 1.35% from 0.85%. This is the first time that the bank has raised rates by 50 basis points at consecutive meetings.

The statement proceeding the decision highlighted the global supply chains issues and they expect inflation to peak later this year and then return to their target in 2024.

The statement concluded with, “The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Australia’s ASX 200 equity index found some support in reaction to the news. The three-year Commonwealth Australian Government bond yield went 8 basis points lower to 2.95% immediately after the announcement.

Going into the meeting, AUD/USD and the ASX 200 had found support to start the week after a sell off to end last week on the back of negative risk appetite permeating markets.

Globally, there is a conundrum for central banks of weighing the recession risk versus inflation containment. Australia might be in a comparatively unique position.

In the week leading up to today’s meeting, Australia’s second tier economic data releases have been strong and all of them surprised to the upside. Retail sales, job ads and vacancies, private sector credit growth, home loans and building approvals all beat expectations.

Before all that data was available, RBA Governor Philip Lowe had already sounded the alarm bell on inflation and the cash rate. CPI is anticipated by the bank to be around 7% by December and the cash rate could be at 2.5%.

Second quarter 2021 CPI was 0.8% and this number will drop off the CPI reading that is due out 27th July. First quarter 2022 CPI was 2.1%.

The first three months of the year only includes one-month of the massive surge in commodity prices, notably energy and food. The largest increases in production costs were yet to be fully passed through to the consumer.

If we assume that second quarter 2022 CPI comes in at the same rate as the first quarter (2.1%), that will give us annual read of 6.3%.

Looking at the extraordinary rise in energy, food and building materials over the second quarter of this year, there is a strong chance of much higher number.

If CPI prints above 7% in July, the RBA might continue with a jumbo hike at their next meeting on Tuesday 2nd August.

Whether or not this translates into higher AUD/USD remains to be scene and global machinations will continue to impact the Aussie.

If AUD/USD continues to languish, then this will further stimulate the domestic economy with the trade balance continuing to add circa AUD 10 billion each month.

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