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The Australian dollar got a good boost this week after… CPI data higher than expected For May, data showed that the YY Weighted CPI rose to 4.0% and the YY SA CPI rose to 4.1%.
As a result of this rise, markets have re-priced heavily into the side of interest rate expectations, with the odds of a rate hike at one of the upcoming meetings moving higher across the board.
Below we can see the sharp rise in the RBA’s expected rate path at that time (vs. a week and a month ago).
Reserve Bank of Australia rate forecast
However, despite the interest rate repricing, the Australian dollar gave up some of its gains yesterday following RBA’s Hauser’s comments.
Why did we see this reaction, and what does it mean for the RBA and the Australian dollar ahead of the next meeting and upcoming data?
Well, here is an excerpt of his comments he made yesterday.
RBA Hauser comments
His comments were not convincing for someone who wants to raise interest rates after this week’s CPI data. Rather, his comments appeared to be an attempt to temper expectations of higher interest rates.
Both the Australian dollar and financial markets reacted pessimistically to his comments. Here’s what interest rate expectations for upcoming policy meetings looked like ahead of his comments (higher likelihood of rate hikes at upcoming meetings):
RBA interest rate outlook ahead of Hauser meeting
Here we can see how money market pricing turned more tolerant after his comments (with a higher probability of holding):
Possibilities of RBA interest rate hikes after Hauser decision
These shifts don’t mean a rate hike won’t happen, of course, but his comments were enough to see some moderation in interest rate expectations. It may not be enough to eliminate the price spikes, but at least it’s a marginal headwind to recent AUD longs that should be taken into account.
