AUD: Low(e) balled

The RBA surprised the market (and us) by choosing to raise its cash rate by 25bp
to 2.60% rather than by 50bp. Unlike the Fed, the RBA has the luxury of time. This
luxury is afforded by Australia’s wages growth being lower than in the US, meaning
that Australia does not face a wage-price spiral like the US. The RBA slowed the
pace of hikes this month as Australian petrol pump prices will jump in October with
the return of the full fuel levy. Also in October, households will have their mortgage
repayments adjusted higher by their lenders to allow for earlier rate hikes. Indeed,
the RBA noted that household balance sheets, which it points out are strong, are
yet to fully feel the impact of higher commodity prices and interest rates. The RBA
wants to slow the pace of rate hikes while these factors are digested by
households. Australian households’ debt to disposable income ratio is nearly
190%, which makes them sensitive to rates. So, the RBA wants to tread carefully
from here on now that rates are in restrictive territory. The RBA remains committed
to further rates hikes, however, which it clearly points out in its statement. We
assumed in our AUD forecasts that the RBA would slow the pace of rate hikes
while the Fed remains hawkish, but we thought they would start slowing the pace
next month. Today’s move by the RBA means it may take slightly longer for the
RBA to reach its peak cash rate, but we do not think it reduces the height of that
peak, which will be around 3.50%. We continue to forecast AUD/USD finish 2022
at 0.65 as the USD softens with weaker cyclical data. Investors will be attracted to
selling AUD/NZD ahead of the RBNZ meeting tomorrow. While we think the RBNZ
will hike rates by 50bp, there is some risk its rhetoric could disappoint hawks.

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