Australian Dollar Recovers from Plung Against the Dollar Following RBA Rate Decision

The Australian dollar (AUD) saw a brief increase after the Reserve Bank of Australia (RBA) raised its cash rate target to 3.35% from 3.10%. This hike, which took place on February 7, 2023, marked the 325th basis point increase since the first hike in May 2022. However, the Australian dollar has since retraced most of its gains.

The reacceleration of the Consumer Price Index (CPI) has caused some concern for the RBA. The latest quarterly figures showed a 7.8% year-on-year increase in the headline CPI to the end of December, surpassing the forecasts of 7.6%. The quarter-on-quarter headline CPI was also higher than expected, coming in at 1.9% instead of 1.6%.

The RBA’s preferred measure of trimmed-mean CPI was 6.9% year-on-year to the end of 2022, above the estimated 6.5%. The trimmed mean quarter-on-quarter CPI was 1.7%, which was higher than the expected 1.5%.

The market was undecided on a rate hike before the CPI data was released, but the evidence of growing price pressure quickly increased the odds. The futures market is now starting to lean towards another potential 25-bps hike in March.

The RBA stated in their accompanying statement that “further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”

The trade surplus for December was AUD 12.25 billion, which was in line with estimates. The prior surplus of AUD 13.2 billion was also revised upward to AUD 13.45 billion.

Australian Dollar Receiving Boost from RBA’s Hawkish Stance but US Fed’s Stance Could Swing the Dynamic

The AUD/USD might get an initial boost from the RBA’s hawkish stance, but the Federal Reserve has also picked up its hawkish rhetoric on its rate path. If the US dollar (USD) gains strength, it may not matter what the RBA does, and the impact on the Australian dollar may be limited.