The aussie will be hoping that Christmas will come early this year with the RBA perhaps delivering a timely present tomorrow. But with markets already well expecting a rate hike this week, will Bullock have anything left in her bag of tricks to give the aussie another leg higher?
As things stand, traders are pricing in roughly 87% odds of a 25 bps rate hike tomorrow, which will take the cash rate to 4.85%. And this will follow the rate hike from September, with inflation proving to be a rather stubborn headache to deal with for policymakers.
But looking further out, traders are barely pricing in any further tightening beyond the one expected tomorrow. In fact, traders only see around 33 bps of cumulative rate hikes by June 2027 and that includes the expected move this week.
Essentially, that is signaling a one more and done move by the RBA. So, could the central bank catch traders off guard given the backdrop ahead of tomorrow?
I would argue that it’s not outside of the realms of possibility as the central bank will want to retain as much flexibility and optionality as they can, as do all major central banks these days. The more hawkish scenario would be a 25 bps hike accompanied by stronger warnings on inflation and a clear indication that further tightening remains firmly on the table.
And if Bullock explicitly pushes back against expectations of an extended pause, that could force traders to rethink the rate outlook. If so, that would be the ideal recipe for another push higher in AUD/USD.
But for that, we need to see three things happen. The first being the RBA signaling that inflation remains a serious concern. That means simply acknowledging that inflation pressures are stubborn won’t be enough.
Second, Bullock must challenge the idea that tomorrow’s rate hike could be the last. And lastly, the RBA needs to sound sufficiently hawkish to shift the expected rate path.
It’s not necessarily the hardest of hurdles to clear but to get through all of that is still rather challenging.
As for the more neutral scenario, it will just be the RBA delivering the rate hike as expected and then keeping their options open. That means Bullock reiterating that policy remains data-dependent without offering much encouragement for further tightening. And I suspect this will be the most likely outcome as she doesn’t want to pre-commit to anything at this juncture.
Meanwhile, the more dovish scenario is where things could get the most uncomfortable for the aussie. Naturally, a surprise hold would be the most obvious shock. But I would say even a rate hike accompanied by softer inflation projections or hints that policy is now sufficiently restrictive could weigh on AUD/USD.
So, those are the three main scenarios to consider as we look to the decision tomorrow.
The question now isn’t so much of whether the RBA chooses to raise the cash rate tomorrow. In all likelihood, they will deliver as expected. Instead, traders should be asking whether Bullock can convince markets that the tightening cycle still has another chapter to go. And that is where any real surprise opportunities will come for AUD/USD traders.
This article was written by Justin Low at investinglive.com.
