While the RBA’s final rate meeting of 2023 is the headline act on the Australian data calendar, movement in AUD/USD and USD/JPY are likely to be dictated by gyrations in US yields and USD/CNH on Tuesday.
By :David Scutt, Market Analyst
- Markets and economists expect the RBA to keep Australia’s cash rate steady at 4.35% in December
- Watch for commentary on inflation and the big shift towards rate cuts globally next year. A hawkish bias is highly likely to remain
- US ISM services to set the tone for the US rate outlook, overriding Tokyo inflation for USD/JPY
- USD/CNH worth watching as it led the reversal in FX and precious metals on Monday
AUD/USD endured a rollercoaster ride on Monday, opening sharply higher before reversing hard in European and North American trade, slamming it back below key downtrend resistance. While the RBA’s final rate meeting of 2023 is the headline act on the Australian data calendar, movement in pairs such as USD/JPY are likely to be dictated by gyrations in US yields and USD/CNH, the latter acting as somewhat of a lead indicator for broader moves in FX and precious metals markets to start the trading week.
RBA statement in focus for AUD/USD traders
With markets and economists unanimous in the view the cash rate will be left unchanged at 4.35% later today, the RBA statement will be the only source of potential volatility in AUD/USD around interest rate decision.
Hawkish bias likely to remain
One of the biggest surprises in November was the perception the RBA had watered down its hawkish bias signalling the risk of further rate hikes, stating, “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”
The statement came across as far less definitive to that offered in October when it read, “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.”
At the time, markets took it as a definitive signal the RBA remained a reluctant hiker, piling into dovish bets on the belief that was the last hike in the tightening cycle. I cautioned at the time that we were dealing with a new Governor who may have a different view on how forward guidance should be communicated following a change in the cash rate. As Bullock’s subsequent public messaging has shown, those jumping the gun looking for a potential dovish pivot were very premature.
It’s likely the hawkish bias provided in November will be repeated in today, although there is a risk it could revert to something similar to that communicated in October as this meeting is highly unlikely to follow an increase in the cash rate.
Inflation, international commentary key
Outside the final paragraph, most interest will be on what the RBA says regarding inflation and the international environment, especially the shift in sentiment towards the outlook for interest rates.
On inflation, it will be interesting to see whether the RBA chooses to emphasise the large undershoot in headline inflation, or the continued stickiness in underlying inflation measures, following the release of the October monthly inflation indicator last week.
It’s also a reasonable assumption the RBA will mention the rapid shift in market pricing for rate cuts next year around the world, including in the second half of the 2024 in Australia. It must be remembered the RBA’s updated forecasts for inflation to return to the top of its 2-3% target range were premised on a further interest rate hike being delivered, rather than easier policy settings. Much like what we saw from the RBNZ, this points to the risk of some form of pushback against the growing dovish tide.
Statement has been a poor guide on RBA’s actual thinking
While it’s only a sample size of two, the tone of the RBA statement has provided an accurate guide as to what the RBA is thinking under the leadership of Michele Bullock, providing a dovish message when the tone of the meeting minutes and speeches has been distinctly more hawkish. If that pattern repeats today, it may provide grounds to fade any dovish interpretation of the statement by markets.
AUD/USD rally goes hard into reverse
Looking at the technical picture for AUD/USD, the strong close last Friday seems like ancient history now with the pair slammed back through downtrend resistance following a decent reversal in the US dollar and US bond yields on Monday.
While the rejection of the break will disappoint bulls, the technical picture still looks reasonable with RSI and MACD still trending higher. AUD/USD also found decent bids on a push towards former support at .6600. With the 200-day moving average only 20 pips lower, those seeking renewed upside could use this zone as protection against a more pronounced reversal. Below, more meaningful support is located at .6520. On the topside, a successful break and hold above downtrend resistance would bring .6720 and even .6900 into play.
Offshore factors to drive USD/JPY
Outside the RBA meeting, FX traders in Asia could do worse than keep a close eye on USD/CNH intraday. As focus was fixated on gold smashing to fresh record highs on Monday, its rally quietly went into reverse, acting as a lead indicator for other Asian FX names such as USD/JPY.
While updated inflation figures from Tokyo will provide some insight as to how price pressures may be evolving nationally in Japan, it’s been shown time and again that the only time we see home-grown volatility in USD/JPY is around Bank of Japan policy decisions. Not even inflation reports seem to move the dial, pointing to the likelihood that CNH and US bond yields may be more influential ahead of the key US ISM services PMI released later Tuesday.
False break for USD/JPY?
Much like the AUD/USD, USD/JPY broke a long-running trend line on Monday only to be hoovered back through it, reacting to a reversal in US yields. While the price action may be the start of a longer-lasting bullish move, much will depend on how the US services PMI prints. It is the standout data release on the US calendar, holding the power to shift expectations towards the US rate outlook.
On the charts, the USD/JPY decline stalled around 146.30 yesterday, making that the first downside level of note. There may be some bids at 146.00 but major support doesn’t kick in until below 145.00. On the topside, 147.50 and 148.40 are the levels to watch.
– Written by David Scutt
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.