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The significant shift from near-zero expectations has also impacted the foreign exchange market
leading to increased demand for the Australian dollar.
“The significant shift from near-zero expectations has also impacted the foreign exchange market, leading to increased demand for the Australian dollar.”
According to recent developments, there is a growing expectation of a possible interest rate hike, despite the prevailing stance of keeping rates unchanged, following the upcoming monetary policy meeting of the Reserve Bank of Australia (RBA) scheduled for 6th at 13:30. Since commencing the rate hikes in May 2022, the RBA continued with ten consecutive increases until March this year, but in April’s meeting, they opted to maintain the rates at the same level. Contrary to the general expectation of no changes at the previous meeting on May 2nd, the RBA implemented a 0.25% increase, bringing the current official cash rate to 3.85%.
During the May meeting, RBA Governor Lowe stated that “additional monetary tightening might be necessary to ensure a return to the target inflation rate within a reasonable period. However, this will depend on the economic and inflation trends.”
Following the announcement, the consensus for the June meeting leaned towards keeping the rates unchanged. Many anticipated that to assess the impact of the rate hike in May, the RBA would maintain the rates in June and consider a further increase in July or August. The RBA’s monetary policy board convenes eleven times a year (almost every month, except for January) compared to the eight meetings typically conducted by most countries, such as Japan, the United States, the United Kingdom, the Eurozone, and Canada. This more frequent adjustment of rates by the RBA can make it challenging to gauge the effects accurately.
One contributing factor to the increased expectation of additional rate hikes is the recent development. The April monthly consumer price index, published on May 31st, exceeded market expectations and the previous month’s level, showing a robust year-on-year growth of +6.8%.
Moreover, the Australian government’s labor tribunal announced on June 2nd that the minimum wage in Australia would be raised by 5.75% starting from July 1st, resulting in an hourly wage of 23.23 Australian dollars.
As a result of these circumstances, the likelihood of a rate hike in June has risen to 40% in the short-term interest rate market. The significant shift from near-zero expectations has also impacted the foreign exchange market, leading to increased demand for the Australian dollar. With the Federal Open Market Committee’s recent indication of a continued status quo on interest rates during the meetings held on the 13th and 14th, there is a favorable environment for Australian dollar buying and U.S. dollar selling, as it aligns with the trend toward narrowing interest rate differentials. However, since the expectation for a rate hike remains a minority view, if an actual rate increase is implemented, there is a high possibility of further demand for the Australian dollar.
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