Australian Dollar Rises Ahead of RBA Interest Rate Decision

• AUD rises ahead of April 04 RBA decision
• RBA expected to keep rates on hold
• AUD would rise on a hike and/or guidance for a May hike
• But AUD downside on a 'dovish' hold would be likely

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The Australian Dollar is in focus over the coming 24 hours as the Reserve Bank of Australia (RBA) is due to deliver its latest policy decision.

The market is poised for the RBA to keep interest rates unchanged, which means the obvious catalyst to an Australian Dollar rally would be a surprise rate hike.

Such a surprise is not an unrealistic expectation given the RBA's apparently erratic stance on monetary policy thus far in 2023.

The February policy meeting surprised markets owing to an apparently newfound hawkishness at the RBA, but this was reversed in March when the RBA said it would give greater consideration to pausing the rate hiking cycle going forward.

"Australia has the least restrictive policy settings in the G10 after Japan in our analysis, implying space to tighten policy further," says a weekly currency note from Barclays.

The RBA would therefore likely offer the Australian Dollar an early April boost if it surprises with a hike.

Ahead of the April 04 decision, the Aussie Dollar is trading with a bid, suggesting markets might be positioning for a 'hawkish' surprise.

The Pound to Australian Dollar exchange rate is a third of a per cent higher on the day at 1.8389, the Australian to U.S. Dollar exchange rate is 0.15% lower at 0.6694.

The Aussie could also be boosted in a scenario where the RBA keeps interest rates unchanged but guides a further hike in May is likely, signalling that a pause does not equate to a finalisation of the cycle.

"The RBA is likely to hold out some chance of rate hikes in coming months. If that guidance is provided, AUD may receive a modest bump of around 30bp‑50bp," says Kristina Clifton, an analyst at Commonwealth Bank of Australia.

Bill Evans, Chief Economist at Westpac, says the RBA will likely keep interest rates unchanged in April but another hike in May will be signalled.

"In an economy with full employment that is still too high and we expect a final 0.25% lift in the cash rate will be required," says Evans.

Above: AUD has lost ground to all major peers over the past month.

The April 04 RBA meeting comes in the wake of inflation data that came in softer than investors were expecting, prompting a lowering of odds for further interest rate hikes at the central bank.

The Australian Dollar came under pressure following the data and extended a run of losses against its major rivals as investors also raised the prospects of RBA rate cuts in the future.

But inflation nevertheless remains well above target and foreign exchange strategists at Crédit Agricole say any pause in April will be a 'hawkish' one.

"Inflation remains well above the RBA’s 2-3% target and too high," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole. "Any pause by the RBA will be hawkish".

Markets are meanwhile anticipating the RBA to cut interest rates in the second half of 2023, a development that has partly contributed to the AUD's underperformance relative to other major currencies over recent weeks.

But Australia’s unemployment rate is just above a 50-year low and threatening stronger wage growth that could make inflation sticky to the upside.

"So, Lowe's likely rhetoric will probably disappoint market pricing for rate cuts by the RBA in 2023," says Marinov.

Such an outcome would be supportive of the Aussie Dollar outlook.

An all-out bearish outcome for the Aussie Dollar would involve the RBA staying on hold while offering 'dovish' guidance consistent with no further rate hikes.

The pricing out of a move in May would likely reinforce expectations for cuts in the second half of the year, ensuring the currency's recent underperformance extends.

"Our economists expect a hike from the RBA, but also see a material risk of a pause, and expect forward guidance to soften further. Markets meanwhile have priced about an 80% chance that the RBA remains on hold. Given these risks and considerations, we reiterate our cautious stance on AUD over the near-term," says a weekly currency strategy note from Goldman Sachs.