AUD Gains Against USD Ahead of Key US Jobs Data, RBA Hike Doubts Persist

• RBA hikes cash rate to 4.60%, highest since 2011.
• AUD gains vs USD near 0.6940 despite hike doubts.
• Markets await US jobs data; strong report could boost USD.

The Reserve Bank of Australia (RBA), under Governor Michele Bullock, raised its Official Cash Rate (OCR) by 25 basis points (bps) to 4.60% from 4.35% on Tuesday, marking the fourth hike this year and the highest level since 2011. This decision, which was unanimously supported by the board and widely anticipated by markets, was driven by persistent inflation concerns and the materialization of some upside risks to inflation, with the RBA stating that “further tightening in financial conditions is warranted” to return inflation to target.

Initially, the Australian Dollar (AUD) saw gains, with AUD/USD recovering daily losses to trade around 0.7020 and AUD/JPY jumping 0.25% to 110.70. However, these gains proved short-lived. During the subsequent press conference, Governor Bullock confirmed the central bank had considered both holding rates and a 25 bps hike. While reiterating the RBA’s readiness to raise interest rates again if necessary due to inflationary pressures expected to last longer from domestic capacity, her cautious remarks tempered market expectations for further tightening. Bullock noted that one upside risk to inflation had materialized, with two others building, and emphasized the need to reduce excess demand, though a recession was not the central forecast. This perceived dovish tone led to a significant reversal in the AUD.

Following Bullock’s comments, the AUD/USD pair dipped below 0.7000 to hit fresh two-month lows at 0.6978, breaking below its 61.8% Fibonacci retracement at 0.7010. The AUD/JPY cross also dropped to an over two-week low just below the 110.00 psychological mark, down approximately 0.45% for the day. Australia’s 10-year government bond yield reached a post-2011 high around 5.4%.

Analysts quickly weighed in on the RBA’s future path:

* TD Securities characterized the September hike as a “risk-management move” rather than the beginning of a new tightening cycle, forecasting no further RBA hikes this year and expecting policy to remain on hold through 2027. They also maintain a negative stance on the AUD relative to the New Zealand Dollar (NZD), forecasting AUD underperformance.
* Standard Chartered noted the dovish tone from Governor Bullock, highlighting the RBA’s acknowledgment of slowing economic growth, easing labor-market conditions, and falling housing prices. The Board also noted that consumption, housing, and labor conditions were easing broadly as expected and did not emphasize domestic pressures as overheating.
* Contrary to some initial forecasts, Westpac now projects the RBA will hike again in November, citing the Australian outlook’s ties to energy prices and the Middle East conflict, though they see a much higher bar for hikes beyond November.
* Market futures, which had priced in a cash rate above 5% by May 2027 prior to the RBA meeting, saw expectations tempered following Governor Bullock’s remarks.

Australia’s August Consumer Price Index (CPI) data, released the day after the RBA hike, showed the headline CPI rising 0.4% month-over-month, a slowdown from 1% in July. The annual CPI rate accelerated to 4.0% from 3.5% in July, aligning with market expectations, while the Trimmed Mean CPI remained steady at 3.6%. Despite the acceleration in the annual inflation rate, the AUD/JPY cross extended its decline to a six-month low, eyeing a break below 109.00, and the AUD/USD pair recorded a new intraday low of 0.6960.

Commerzbank analyst Volkmar Baur stated that market expectations for 1.5 further RBA hikes appeared excessive following the softer August CPI data. Baur highlighted the lagged effects of previous monetary tightening and ongoing weakness in the real estate sector as reasons for the RBA to likely wait before further action, suggesting the AUD is unlikely to receive additional support from the central bank.

Throughout the week, the Australian Dollar continued to face downward pressure, largely due to the persistent strength of the US Dollar (USD). The USD maintained its strength from elevated US Treasury yields and oil prices, with 5- and 10-year T-note yields above 5%, and 20- and 30-year bond yields at 5.61% and 5.56%. Even softer-than-expected United States (US) inflation data, where the US Personal Consumption Expenditures (PCE) Price Index revealed annual headline inflation remained unchanged at 3.4% in August (missing the 3.7% market expectation), provided only a temporary rebound for the AUD/USD. The pair subsequently came under renewed selling pressure as the US Dollar rebounded from its post-data lows.

By Wednesday, the AUD posted larger losses of 0.57% against the USD, trading at 0.6947. This decline continued into Thursday, with the AUD/USD falling to around 0.6910, down 0.48% for the day, as rising US Treasury yields continued to support the Greenback. The AUD was notably the strongest performer against the Japanese Yen but lost ground against safe-haven currencies.

On Friday, the AUD/USD remained subdued for the fifth consecutive day, trading around 0.6930 during Asian hours. The US Dollar continued to receive strong support from persistent inflation concerns stemming from elevated energy costs, alongside market expectations of higher US interest rates. Traders are now closely watching the upcoming release of US September employment data, with economists projecting Nonfarm Payrolls to show an addition of 90,000 jobs, marking a slowdown from the 162,000 recorded previously, for signals regarding the future direction of Federal Reserve monetary policy.