Aussie in holding pattern ahead of RBA

The Australian dollar has started the week quietly, and that will likely continue until the RBA policy meeting on Tuesday. Currently, AUD/USD is trading at 0.7528, up 0.16% on the day.

The RBA was in the spotlight last week, as the central bank butted heads with the markets over bond yields, and the markets appeared to have prevailed. The RBA abandoned its bond yield target, the pillar of its bond-purchase programme. The April 2024 CGB yield has jumped to 0.75% on Friday, vs the RBA’s target level of just 0.10%. The Australian dollar enjoyed a good week and pushed above 0.75 level, but the main topic of conversation was the bond yields.

After being bruised badly in the bond tussle last week, it appears that the RBA will completely throw in the towel and terminate its yield curve control. More importantly, the RBA is expected to shift its forward guidance and signal that it could raise rates in the second half of 2023. RBA Governor Lowe has said many times that economic conditions would not be suitable for a rate hike until 2024, but a strong recovery and high inflation will likely force the bank to adopt a more hawkish policy. The markets have been aggressive in pricing in a series of rate hikes, with the cash rate projected to rise to around 1.5% by the end of next year.

Australia data was strong on Friday, but the Australian dollar still had a losing session. Retail sales for September surprised on the upside, with a gain of 1.3% vs expectations of 0.3%. On an annualized basis, Retail Sales jumped 1.3% (YoY), but this gain was exaggerated by base effects, as there was a severe lockdown in place in September 2020. On the inflation front, PPI accelerated in the third quarter, with a gain of 1.1% (QoQ), ahead of 0.7% in Q2. On an annualized basis, PPI climbed 2.9%, vs. 2.2% in Q2.

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AUD/USD Technical 

• There is resistance at 0.7563, followed by resistance at 0.7606
• There are support levels at 0.7471 and 0.7422

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