The Reserve Bank of Australia meets next week and the short-term interest rate derivative markets are pricing in a 94% chance of an RBA hike. The question is, ’will the RBA hike?’. At the last central bank meeting, the RBA took a ‘hawkish hold’, but recognises that it may need to be ‘less patient’ over hiking rates due to increasing inflation pressures.

Even more reasons to be less patient?

On Wednesday 27th April the latest inflation data came in very hot. You can see the print here and how the headline is now at 5.1% y/y above the maximum high expected of 4.9%.

So, inflation pressures are building and this should in principle give the RBA a green light to hike rates.

The one missing piece?

However, there is one area the RBA really wants to see inflationary pressures building and this is in the labour market. . At the last RBA meeting, the RBA recognised that wage growth has picked up, but still sees it at the relatively low rates that were around before COVID. The next wage price index print comes in around the middle of May. If wage prices grow to 3% y/y that would essentially be seen as the green light to hike rates for the RBA. It is the only piece of the jigsaw that the RBA wants to see falling into place.

The trade

One trade that looks interesting is if the Fed’s meeting on the following day sees a buy the rumour and sell the fact response. If it does and the RBA has made a hawkish shift then AUDUSD longs could be attractive.