RBA keeps cash rate on hold at 4.10% but maintains tightening bias. Equities mixed, bond yields up, crude down, gold up, US dollar down

By Stuart Talman, XE currency strategist

As expected, newsflow has been light over the past 24 hours given US cash markets are closed or have traded abbreviated sessions. A lack of tier 1, market moving events in other regions also contributes to the subdued backdrop.

For the second day running, the New Zealand dollar sits atop the G10 leaderboard, albeit outperforming in amongst relatively small net moves. Gaining over two-thirds-of-a-percent, the Kiwi's third day of gains has lifted the currency from Thursday's low at 0.6050 back up through 62 US cents. Tuesday's high has been marked a few pips north of 0.6210.

The Reserve Bank of Australia's interest rate decision was the major scheduled event over the past 24 hours. Aligning with market pricing, the RBA kept dates on hold. The key takeaways:

• RBA maintains the cash rate at 4.10%
• Maintains tightening bias
• Inflation still "too high"

 Given market pricing was circa 70/30 in favour of an on-hold decision and a slim majority of analysts as polled by Reuters and Bloomberg favoured a steady cash rate at 4.10%, the RBA delivered the expected outcome following two non-consensus hikes in May and June.

The decision was viewed as a hawkish hold, given the RBA clearly maintains a tightening bias via its reference to inflation remaining too high, commenting in the accompanying statement:

Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline. But inflation is still too high and will remain so for some time yet. High inflation makes life difficult for everyone and damages the functioning of the economy.

It seems the RBA has assigned considerable weight to the monthly CPI data point, leveraging last week's downside miss for the headline reading as justification for a second pause over the past four months.

Given Australia has high levels of household debt relative to other developed nations, the RBA is conscious of overstepping the mark during the mature stage of one of the more aggressive tightening cycles in recent memory.

On the other hand, inflation as measured by the trimmed mean (the RBA's preferred measure, stripping out volatile items) is still ~300bps above the upper bound of the RBA's 1%-3% target range. Should the more robust quarterly CPI report, later in the month report a lack of progress in further dampening consumer prices, the RBA likely hikes again in August.

Futures markets currently assign a ~70% implied probability the cash rate will be lifted to a 4.60% cycle endpoint via two more quarter point hikes.

The Kiwi firmed against the Aussie, NZDAUD climbing from the low 0.9200's prior to the announcement to mark Tuesday's high a couple of pips above 0.9270 before easing back to 0.9250.

Given the RBA remains the more hawkish of the two antipodean central banks, we don’t expect too much upside beyond current levels. Our near-term key resistance level remains at 0.9250 which also aligns with the 100-day moving average. The pair has not traded above this widely monitored trend following indicator for over a month.

Looking to the day ahead, FOMC minutes released at 0600 tomorrow is the headline event on the global economic calendar. Market participants will digest these to gain more colour regarding the hawkish psyche of the majority of FOMC members who project 2 or more additional rate hikes (via the latest dot-plot release).

Caixin services PMI which measures economic activity for smaller, private firms in China is the sole regional event of note. Despite the sputtering economy, services activity remains firmly in expansionary territory.

The Kiwi's three-day advance has propelled price action back to key technical upside levels, touching the 100-day moving average near 62 US cents. Further upside and a re-test of the 16 June swing high near 0.6250 shifts the short term bias to bullish whilst failure at 0.62 may initiate renewed selling.

Stuart Talman is Director of Sales at XE. You can contact him here.