RBA Hike

The Reserve Bank of Australia has recently eased its monetary tightening strategy with smaller rate adjustments. Today it delivered another miniscule 25 basis points rate hike, the third straight of this size and the eight increase in a row overall. ^[1]

The cash rate now stands at 3.1% and the highest level in 10 years and despite the recent downshift, officials expect to "increase interest rates further over the period ahead", although they reiterated that policy is "on a pre-set course".

The RBA has moderated its pace of hikes in order to avoid a hard landing, but inflation so far does not help. The Consumer Price Index climbed to 7.3% in the third quarter y/y and 6.9% y/y in October, while the bank project it to peak at 8% this year.

Eyes on the Fed

Fed Chair Powell pointed to a smaller 50 basis points rate increase in next week's upcoming meeting, which would mark a downshift, after a series of historically large 0.75% moves. Recent moderation in CPI and PCE inflation figures, have been supportive, but other data point to further tightening.

Last week's Jobs Report showed the strong addition of 263,000 payroll in November, while wages increased. GDP grew by a healthy 2.9% in Q3 according to the second reading, which was more than expected. Furthermore, ISM services activity surprised to the upside yesterday and fatcory orders increased.

Markets have priced in a 50 bps rate hike this month, but there is some indecision around the terminal rate. At the time of writing, CME's FedWatch Tool assigns the highest probability to rates peaking at 5.25%. ^[2]

China Covid Situation

Markets have also been monitoring the pandemic situation in China, were infections remain elevated. Recent protests against the strict lockdowns in the world's second largest economy, have led officials to ease their stance.

Although the zero-Covid policy has not been abandoned, authorities look to minimize the socioeconomic impact, mostly with regional changes. Beijing for example, no longer requires Covid testing for entrance to public places such as supermarkets. ^[3]

AUD/USD Analysis

The pair slumped on Monday, as the strong PMI data from the US firmed up expectation around the Fed's tightening path and sparked a USDOLLAR rally. Today however, it finds support as the Reserve Bank of Australia signaled more rate hikes ahead and China eases its pandemic containment measures.

The technical outlook has not changed much from our last analysis, since AUD/USD rejected the 200Days EMA during last week's advance and faltered once again at the familiar 38.2% Fibonacci of the of the 2022 High/Low drop.

This creates risk for a breach of the EMA200 (0.6630), but the Aussie looks well protected from that point on and the ascending trendline from the 2022 lows looks distant (mid-0.6400s).

Despite the shaky start to the week, bulls have not lost control and can take another crack at the DMA200, but don't inspire confidence at this stage for an advance past 0.6917.