RBA hammers home rate hike messageUndermines AUDAs GBP/AUD looks to turn a cornerCrédit Agricole are sellers of AUD

Image © Adobe Stock

The Australian dollar has come under pressure after the RBA's minutes of the last meeting once again made the case that the first interest rate hike was not likely before 2024.

The Reserve Bank of Australia (RBA) said it is prepared to be patient and won’t raise the cash rate until its inflation objective has been met.

It committed to keeping highly supportive monetary conditions in place even as the economy was seen to be bouncing back quickly as restrictions eased.

Speaking after the release of the minutes, RBA Governor Philip Lowe said "the latest data and forecasts do not warrant an increase in the cash rate in 2022".

The comment was a pointed rebuttal to investors who have been pricing a rate hike occurring as soon as 2022, betting that the RBA would fold in the face of rising inflation and economic growth and raise interest rates.

But the governor said for inflation to become a concern for the central bank wage growth must rise by a material amount, specifically in the 3%-or-more bracket.

This is an unlikely outcome in the near-term given wages rose 1.7% year-on-year in the second quarter of 2021.

Foreign exchange markets are particularly sensitive to central bank policy and the RBA's desire to position itself as one that won't raise interest rates for many months to come acts as a distinct headwind to its currency.

GBP/AUD reference rates at publication:

Spot: 1.8354High street bank rates (indicative band): 1.7712-1.7840Payment specialist rates (indicative band): 1.8180-1.8262Find out about specialist rates, hereOr, set up an exchange rate alert, hereIndeed, nowhere is the stance more acute than when compared to the Bank of England and British Pound as a rate rise could now come as soon as December.

The odds for a UK rate hike in December have risen over 50% during the past 24 hours on the back of testimony by the Bank of England's Governor Andrew Bailey before parliament and a strong set of labour data released Tuesday.

Even if the Bank swerves a 2021 rate hike the odds of a February hike are priced at over 100%, meaning the Bank of England will still raise rates a great deal earlier than its Australian counterpart.

The Pound to Australian Dollar exchange rate lifted further above a temporary floor located around 1.82 and is quoted at 1.8330 at the time of publication.

"With no sign of a substantial pickup in wages – a key criteria for the RBA, a rate increase should be seen as some way off," says says Raffi Boyadjian, Lead Investment Analyst at XM.com.

"The key for the RBA remains wages growth and their belief that it will take a long time before the labour market is tight enough to generate wages pressures that warrant corrective action," says Daragh Maher, Head of FX Strategy at HSBC.

But the door has been left ajar to a 2023 rate hike after the RBA acknowledged that as inflation had been higher than expected of late there is the possibility that the first hike could come a little sooner.

"Markets are still not convinced and expect policy tightening to begin next year, hence, why the Aussie slipped only marginally," says Raffi Boyadjian, Lead Investment Analyst.

While the RBA's guidance acts as a dampener on Australian Dollar upside it is by no means a source of outright bearishness, particularly given the market's unwillingness to fully swallow its communication.

What happens next is less certain as we are seeing signs the Australian Dollar's strong run since August could be fading, threatening to arrest the near-term trend lower in GBP/AUD.

Above: GBP/AUD at weekly intervals.

Fading strength comes as positioning models at investment bank Crédit Agricole finds the Australian Dollar to now be overbought, prompting strategists to recommend investors sell the currency.

This particular model (G10 FX PIX 2.0) model is up 8.89% over the past 12 months with a successful hit ratio of 59%.

"Our FX flow data points at hedge fund outflows. The latest squeeze of AUD-shorts has been too aggressive according to our analysis, and the currency is looking overbought relative to its long-term positioning trend," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.