Trading AUDNZD Ahead of the RBA’s Decision On Interest Rates

The Reserve Bank of Australia will meet again on Tuesday to announce their latest monetary policy plans.

Markets are now pricing in a 50-basis point hike that would take interest rates in Australia to 2.35% from their current level of 1.85%. In the AUDNZD pair, we can see a potential high in place at the 1.125 level. It is possible that the pair could now trade to the bottom of the price channel at 1.100 and a move below that also opens up a chance to retest the parity level.audnzd chart

AUDNZD-Weekly Chart

The Australian dollar could struggle if the RBA chooses a smaller rate rise, or if they provide a more dovish outlook for future meetings. New Zealand raised interest rates to a seven-year high of 3% recently, and the NZD would benefit from a dovish RBA this time around.

The Australian Consumer Price Index increased at an annualised pace of 6.1% in the second quarter of the year, marking the highest level in over 30 years, according to the ABS. The outlook for higher rates is hurting consumer sentiment and may even derail the country’s booming property market. Home loans were 8.5% lower in July than in June, which is the second-largest fall in 20 years. The bank will be wary of rocking housing markets and being seen as the cause of a recession, and they may look to slow the pace of future rate moves.

The RBA puts its focus on three areas: price stability; full employment; and “the economic prosperity and welfare of the people of Australia.”

The employment market is a big consideration for the RBA and, in the latest data, the Australian Unemployment Rate fell to 3.4% in July – the lowest in nearly fifty years. The bank will take heart that interest rates have not yet fed through to employment, but will perhaps be concerned about the home loan data.

Some analysts are still bullish on the RBA policy path, with David Plank of ANZ Bank saying:

“We don’t think Tuesday’s 50bp hike will be the last such move by the RBA.” Given the strength of inflationary pressures, we think the RBA will want to take the cash rate some way above what it thinks is the bottom of the neutral range. “

“Given our expectations, we think a 50bp rate hike in October is more likely than 25bp,” he added.

A move back to 1.125 would put the long side back in play for the Australian dollar.

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