The Reserve Bank of Australia (RBA) is widely expected to hike the Cash Rate by 25 bps and bring it to 3.85% following hot employment and inflation data. In fact, the latest jobs report showed a much bigger than expected gain in December and the unemployment rate fell to 4.1% vs 4.3% prior. That’s when the market started to price in a rate hike at the February meeting with the Australian Dollar surging across the board.
The case was sealed following higher than expected inflation data in the Q4 CPI report where the Trimmed Mean CPI Y/Y rose to 3.4% vs 3.0% prior. This is much higher than RBA’s 2-3% target and counter to the central bank’s forecasts. In fact, the RBA expected inflation to moderate in the December quarter because some of the increase in the September quarter was seen as temporary. They were clearly wrong.
Moreover, RBA Governor Bullock said that inflation and jobs data would be important for the February board meeting and that, if the data suggested inflation was not slowing, this would be considered at the meeting.
Traders aren’t going to focus on the rate hike because that’s already priced in. The focus will be on the forward guidance and whether the RBA strikes a hawkish or cautious tone. The market is pricing 55 bps of tigthening by year-end, which means there’s another rate hike expected.
The central bank will need to “out-hawk” traders’ expectations to boost further the Australian Dollar. That’s not going to be easy for them as they will likely need to pre-commit to a rate hike earlier than expected or signal more rate hikes than currently priced in (for that the updated forecasts will be eyed). Therefore, the risks for the Australian Dollar are mostly skewed to the downside just because of the current positioning.
If the RBA surprises keeping the Cash Rate steady at this meeting, we will likely see the Australian Dollar selling off across the board as positioning resets. From a risk management perspective, it doesn’t make sense for the RBA to wait further at this point.
