I’m a central banker, get me out of here
Ant and Dec were not present at the RBA decision overnight. However, based upon the reception of the decision, Governor Michele Bullock might rightly feel she was in one of the duo’s trials. Markets offered a frosty reception to the Reserve Bank of Australia’s latest interest rate decision overnight. Investors sold the Aussie Dollar and drove yields lower on benchmark debt instruments. The governor cited a weaker labour market and signs of faltering inflation as reasons not to deliver a final hike in 2023. Whilst the decision had been priced in and was delivered largely as expected, the decision to hold rates at 4.35% has pushed AUD lower across the board. However, the ramifications of the decision overnight could spread wider than just Australia. Wider even than neighbouring or integrated economies including New Zealand and China.
The RBA decision could have come at a convenient time and appropriate shape to stem losses within the US Dollar. The greenback has been undermined by two factors. Firstly, following a sharp spike in medium term yields, momentum more recently in rates is increasingly one way: downward. Secondly, the once impossible thought of a soft landing from recent economic events has somehow become mainstay. The RBA decision overnight provides a remedial comparison to both of those beliefs.
Firstly, whilst the decision to hold implies nothing for the path of US rates in and of itself, it does highlight the positive differential that US paper holds over many other G10 alternatives. This could drive demand for the Dollar as investors seek greater returns. Secondly, citing a softening labour market and wider economic conditions follows the theme of yet another systemically significant economy drifting further away from a soft landing. It shouldn’t be much of a surprise therefore that as the AUD slipped below its 200-day living average, trade weighted USD kicked slightly above its own.
Discussion and Analysis by Charles Porter
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