More Australian Dollar Upside as Markets Unprepared for Another RBA Rate Hike says Investment Bank

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Commerzbank has suggested that the Australian Dollar may experience a boost if market players have underestimated the strength of the Australian economy, as well as the Reserve Bank of Australia's (RBA) resolve to pursue further interest rate hikes.

The assessment follows the release of this week's Australian labour market data, which has surpassed market expectations and has led to renewed optimism among investors about the prospects of the Aussie currency.

In particular, the robustness of the Australian economy and the RBA's monetary policy decisions have become a key focus for traders.

"The Australian labour market data surprised positively yesterday," says Esther Reichelt, FX Analyst at Commerzbank.

AUD rose after Australia saw 53K jobs added in March according to the latest Labour Force survey, surpassing market expectations of 20K.

"This suggests that the labour market remains very tight. In addition, the new data might encourage the FX market to revise its view of future key rate developments," says Reichelt.

The unemployment rate remained steady at 3.5%, defying expectations of a slight increase to 3.6%.

As a result of the better-than-expected numbers, the Australian dollar was the strongest-performing G10 currency on Thursday.

"The AUD was an exception and an outperformer on the back of strong Australian labour market data," said Valentin Marinov, Head of G10 FX Strategy.

The Australian Dollar has struggled over recent weeks as markets have factored in the ending of the RBA's rate-hiking cycle.

Indeed, the RBA last week opted to keep interest rates unchanged, despite elevated inflation.

"The FX market had clearly focussed on the Australian central bank (Reserve Bank of Australia, RBA) pausing its rate hike cycle before the Fed despite the fact that inflation remains significantly elevated. As a result, the aussie depreciated," says Reichelt.

But, the RBA did say it could hike interest rates again if required and that a pause was not to be interpreted as a definitive ending of the cycle.

Above: RBA rate change expectations. Image courtesy of ANZ.

Money market pricing meanwhile reveals investors see the potential for a rate cut to have been delivered by the RBA by the end of 2023.

But Commerzbank says expectations for a rate reversal seem premature given RBA officials keep underlining that it is not unusual for rate hike cycles to be paused supports this view too.

"Moreover, the RBA had signalled such a pause in advance and had underlined last week that further rate steps might follow. The positive labour market data means that such a step has at least not become less likely," says Reichelt.

The outcome of April 26's inflation data could swing it for the Aussie:

"Contrary to the monthly publication the latter covers the complete basket of goods and therefore allows for a better evaluation of price developments. If this one was to surprise too there is a lot to suggest that the RBA will hike rates further, contrary to market expectations," says Reichelt.

Commerzbank says the Australian Dollar would come under appreciation pressure if inflation comes in stronger than expected and prompts the market to reevaluate its expectations for RBA interest rate policy.