RBA to hike 40 bp in May says INGAnd again in JuneBut +ve impact on AUD to be limited

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Reserve Bank of Australia interest rates hikes are coming sooner and faster "than we all thought" says ING Bank, but strategists at the bank warn they will have a limited impact on the Australian Dollar.

Robert Carnell, Regional Head of Research for Asia-Pacific at ING, says the RBA has been gradually making room for itself to tighten in the coming months.

"But much higher-than-expected inflation in 1Q22 means a May hike is in the frame, and there is a good argument for some front-loading too in subsequent meetings," says Carnell.

The comments come after Australian CPI inflation for the first quarter rose 2.1%, beating expectations for 1.7%.

The RBA's favoured Trimmed Mean measure of inflation rose 1.4% Q-o-Q, beating expectations for 1.2%.

ING now expects the RBA to respond by hiking by 40 basis points in May with another 50 bp hike coming on June 07.

Typically the ramping up of rate hike expectations would be viewed as a positive for a currency: indeed, the relentless pricing of higher RBA rates by the market might explain some of the Aussie Dollar's outperformance in 2022.

"At the time of writing, markets are pricing in 18bp of tightening at the May meeting. If our expectation for a 40bp hike proves correct, AUD is looking at some decent upside potential next week," says Francesco Pesole, FX Strategist at ING.

But ING says any positive impact on the Australian Dollar emerging from heightened rate hike expectations may be offset by a challenging external environment.

"The market's pricing further down the road is, however, more aggressive (around 240bp worth of hikes), and while the notion of front-loaded tightening can offer support to the currency in the near term, it can limit the room for appreciation in the longer run," says Pesole.

Over coming weeks the analyst warns there is a risk that the impact from an RBA hike may prove a one-off positive event for the Aussie dollar, as the external environment remains highly challenging for the currency.

The Australian Dollar is particularly sensitive to developments in China, given its importance to exports and ING says China’s Covid crisis and the negative implications for the demand outlook in the region could weigh.

Furthermore, global risk sentiment is deteriorating as markets grow increasingly concerned of a global slowdown.

ING expects any RBA-induced rally in AUD/USD may stall around the 0.7300 area, "if it even reaches such levels".

"Contrasting factors suggest a flattish profile in AUD/USD into the summer," says Pesole. (Set yor FX rate alert here).