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Is it safe to buy the Australian dollar after the RBA’s surprise rate hike?

on May 3, 2022
  • RBA hiked more than expected
  • AUD gained accross the board
  • AUD/USD traders wait for the Fed to move

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The Reserve Bank of Australia (RBA) is one of the few major central banks that holds a monthly meeting to evaluate the economy and set the appropriate interest rate. It does so at the start of every month, on a Tuesday.

As such, today was a big day for Australian dollar traders. The market’s expectation was that the RBA would hike the cash rate to 0.25% from the 0.1% level.

However, the RBA decided to do more – it raised by a quarter of a basis point, setting the cash rate to 0.35%. It cited rising inflation and the economy’s resilience and surprised the market.

In consequence, the Australian dollar soared across the FX dashboard. It gained against its peers, such as the US dollar or the New Zealand dollar.

While the gains on the AUD crosses are significant and not from today only, the AUD/USD gains are not that impressive. Sure enough, the pair rose above 0.71, but the overall picture shows that the market just bounced from close to its 2022 level.

Fed’s decision looms large

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The Federal Reserve’s hawkishness caused other central banks to reconsider their monetary policy stance. For this reason, today’s rate hike in Australia should be interpreted in the context of the Fed’s past and future rate hikes, at least when trading the AUD/USD pair.

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The US dollar’s strength is a problem for US exports. As seen last week, exports in the US declined, mostly on the back of a strong currency.

As a result, the US economy shrank in Q1 of 2022. If there are two consecutive quarters of negative economic growth, the economy has officially entered recession.

So, the Fed should be cautious here. However, the market has priced in a 50bp rate hike at tomorrow’s FOMC meeting; thus, the US dollar might move higher in the short-term rather than lower.

In other words, the Fed’s hawkishness may send the dollar even higher, thus affecting the exports and economic growth. For this reason, it is unlikely that AUD/USD traders would buy the pair with confidence until the Federal Reserve releases its statement tomorrow.


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