On Tuesday at 05:30 UK time, the RBA will be meeting and deciding on whether to hike rates or pause on rates. At the moment, the market is pretty much evenly split over what decision the RBA will make. At the end of last week, short-term interest rate markets saw a 37% chance that the RBA would hike by 25bps and a 63% chance that it would pause on rates. So, according to short-term interest rate markets a 25 bps hike would be a surprise.

Economists favour another hike

A recent Reuters poll sees 16 out of 31 economists favouring a 25bps hike, with 15 seeing a pause ahead from the RBA. So, when you combine the survey with short-term interest markets it is roughly a 50/50 split as to whether the RBA will hike or not. Remember, that the RBA delivered a hawkish surprise hike in its last rate decision.

Look to the forward guidance for the moves in the AUD

What markets will want to know is whether or not the RBA has finished hiking rates. STIR markets still see a terminal rate of 4.62% in the spring of next year.

So, communication will be crucial for the moves in the AUD. Here is what to watch for:

  • If the RBA hikes by 25 bps and signal that it has finished hiking rates then expect the AUD to spike higher on the release and then be immediately faded.
  • If the RBA pauses rates but more rate hikes are still to come, then it will depend on how many extra hikes it signals. If it signals a terminal rate of 5% or higher then the AUD will still likely gain.
  • If the RBA pauses rates and signals that it has finished hiking rates and that it is at the terminal then the AUD will likely sharply fall as the higher rate expectations get priced out. The pairs to watch would be the AUDUSD or the AUDNZD for potential falls.