FX Update: RBA surprises hawkish again, extending AUD gains.

Today's Saxo Market Call podcast

FX Trading focus:

• AUD rallies on second consecutive surprise hike from RBA
• The waiting game on USD as liquidity/Treasury issuance test lies ahead.

Trading and bias notes:

• AUD: RBA surprise hike inspires AUD jump – huge resistance level in AUDUSD tested today at 0.6680+. The full bullish reversal is not in play yet until this level is broken (and USD elsewhere quite firm today). AUDNZD continued higher, but looking very overbought – next key resistance into 1.1088 pivot high from February (and high since last October.)
• USD: the sell-off attempt late last week led nowhere and was quickly countered. Looking for ways to express a long view again with potential fuel to come from liquidity pinch as US treasury rebuilds its reserves after the lifting of the debt ceiling. Climax reversal of GBPUSD suggests new downside test ahead as long as pair remains below 1.2450 area. The recent pivot low there is 1.2308. EURUSD has more room to range lows into low 1.0500’s.
• SEK and NOK: sell-off in EURSEK and EURNOK quickly gathered up, back to neutral on SEK and NOK.

AUD: yet another surprise hike from the RBA
For the second consecutive meeting, the RBA surprised expectations with another 25 basis point rate hike, taking the cash rate target to 4.1%. The RBA’s statement indicated that while it felt inflation was past its peak, that it would require some time for it to return to the target range and that the move was aimed at increasing confidence that inflation would fall. The statement also noted wage pressures rising (As it began increasing rates last year, much of the RBA focus was on weak wage growth as a reason to take a slow approach to hiking rates), particularly in the public sector. Recent house price rises were also noted and the Bank guided for possible further policy tightening going forward: “some further tightening of monetary policy may be required”. The move sent AUD higher still, but without more support from the commodities market and risk sentiment, the AUD may be nearing its ceiling for now. A weak CNH is also a potential drag as dark clouds continue to dog the Chinese recovery story.

Chart: AUDUSD
We noted on Friday that the AUDUSD threatened a reversal on a move back above the 0.6600 area, which was the important area on the way down to the recent lows, but also noted that a full take-out of the 0.6700 area would be important for “a more emphatic reversal”. The RBA’s surprise hike has the pair poking at this important area, which includes the 0.618 retracement of the recent sell-off in the 0.6680 area and then the 200-day moving average a bit higher. A weak close today would put the pair back in limbo – stay tuned, and worth noting that Australian 2-year yields have already erased about half of the reaction to the surprise hike overnight.