Australian Dollar Slides Across FX Majors After a Cautious RBA Hike

The Australian dollar slid across the FX majors after the Reserve Bank of Australia raised its cash rate by 25 basis points, because markets read the decision as less hawkish than the hike itself. Three board members voted to hold, and the statement dropped its explicit pledge to raise the cash rate further if needed. The hike took the cash rate to its highest level in 18 years, yet pricing for further tightening eased and the five-year Australian bond yield fell below the new cash rate. For currency markets, the focus shifted from the size of the hike to how much room the RBA has left.

Matt Simpson, StoneX Media Market Analyst at StoneX, covers currencies, equity indices, gold and oil, with a focus on FX macro, technical analysis and market sentiment. That coverage gives insight into what is driving the Australian dollar, from Reserve Bank of Australia policy signals to shifts in global risk appetite.

Key Themes

• Three Reserve Bank of Australia board members voted to hold, after a unanimous decision at the previous hike.
• The RBA statement removed its reference to raising the cash rate further if necessary.
• The Australian dollar fell against the U.S. dollar, euro, British pound and Swiss franc after the decision.

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Australian Dollar Weakens as the RBA Drops Its Tightening Pledge

The Australian dollar weakened after the Reserve Bank of Australia hike because the board split and the statement softened its commitment to further tightening. Three board members voted to keep the cash rate unchanged, a break from the unanimous decision at the previous hike. Simpson points to the final paragraph of the earlier statement, where "the board said it will do whatever is necessary to bring inflation back to targets, including increasing the cash rate if necessary", a reference the latest statement removed. The updated RBA projections pull in two directions, with inflation, wages and the cash rate revised higher while growth was lowered and the unemployment forecast raised. As a result, the RBA statement points to a meeting-by-meeting approach, leaving the Australian dollar without the support of a clear tightening bias.

Australian Dollar Selloff Hits the Pound, Euro and Swiss Franc

The Australian dollar fell broadly across the FX majors after the RBA decision, losing ground against the U.S. dollar, the euro and the Swiss franc, and against the British pound in particular. Weaker domestic data adds to the pressure, since business and consumer sentiment in Australia has been rolling over during the hiking cycle. Consequently, the Australian dollar is exposed on two fronts, from softer data at home and from any shift toward risk aversion in global markets. According to Simpson, "Unemployment is rising faster than they wanted to see, and if we get a broader risk-off tone elsewhere, it could spell further trouble for the Aussie."

Australian Dollar Pressure Shows Up First in Yields and Rate Pricing

Pressure on the Australian dollar surfaces first in Australian bond yields, where the five-year yield trading below the cash rate shows how much further tightening markets are willing to price. The two-year yield differential between Australia and the U.S. tracks the relative rate appeal of the Australian dollar against the U.S. dollar. Forward pricing for the RBA against the Bank of Canada shows how far the rate advantage behind AUD/CAD is narrowing, evidenced by markets pricing further Bank of Canada tightening while the RBA path is effectively flat. Business and consumer sentiment surveys and the unemployment rate show how the hiking cycle is feeding through to the Australian economy.

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: Matt Simpson, StoneX Media Market Analyst