How is the RBA’s hawkish shift supporting the Australian Dollar? – MUFG

Rising expectations of an RBA rate hike have put Australian yields in focus, with MUFG’s Lee Hardman noting that inflation risks are now seen as “materially worse” than previously forecast. While higher domestic yields have supported the Australian Dollar this year, the currency has underperformed recently alongside weakness in AI-related trades. Markets are now pricing in nearly a 50:50 chance of another RBA hike next month.

What is driving the hawkish repricing of RBA expectations?

"The Australian rate market has moved overnight to price in a higher probability of another RBA rate hike before the end of this year after hawkish comments from RBA Deputy Governor Andrew Hauser who stated that the inflation outlook looks “materially worse” than forecast by the RBA back in August."

"He added that “we’re seeing higher AI prices, tech prices feeding through into CPI…and we’re having a boom in data centre construction here in Australia as well, so that’s upside too, and then on domestic capacity pressure”."

"He displayed concern that “inflation has been high for a very long time now, and we are beginning to see some signs that people in the community are not sure if we’re going to bring inflation back to target, or certainly not for an extended period”."

"The hawkish comments have encouraged market participants to price in closer to a 50:50 probability of another RBA hike next month."

"Higher yields in Australia have encouraged a stronger Australin dollar this year although it’s has underperformed recently alongside the wobble for AI-related trades."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)