AUD/NZD hovers around 1.1550 following cautious remarks from RBA’s Hauser
- AUD/NZD may regain its ground due to a cautious tone surrounding the RBA stance.
- RBA’s Hauser warned that if policy is no longer mildly restrictive, it could significantly impact future decisions.
- NZD weakens as markets price in a likely 25-basis-point RBNZ rate cut to 2.25% in November.
AUD/NZD remains flat after registering more than 0.25% losses in the previous session, trading around 1.1550 during the Asian hours on Wednesday. The currency cross remains near 1.1590, the highest since September 2013, reached on November 10.
The Australian Dollar (AUD) may rise against its peers due to cautious sentiment surrounding the Reserve Bank of Australia (RBA) policy outlook. RBA Deputy Governor Andrew Hauser said on Wednesday, “Our best estimate is that monetary policy remains restrictive, though the committee continues to debate this.” Hauser added that if policy is no longer mildly restrictive, it would have significant implications for future decisions.
On the data front, the University of Melbourne released on Tuesday that Australia’s Westpac Consumer Confidence jumped 12.8% in November to 103.8, surpassing 100 for the first time since February 2022. The rebound follows a 3.5% decline in October and marks the strongest non-pandemic reading in seven years, driven by improving economic conditions and easing external risks.
The AUD/NZD cross may continue its winning streak as the New Zealand Dollar (NZD) struggles amid the increasing likelihood of a 25-basis-point rate cut to 2.25% by the Reserve Bank of New Zealand (RBNZ) in November. Markets also price in a 10% chance of a deeper 50-basis-point cut, amid rising job losses and the economy edging toward a second recession.
The dovish sentiment surrounding the RBNZ policy outlook increased following the release of the RBNZ Inflation Expectations on Tuesday, which remained consistent at 2.28% for the quarter-over-quarter (QoQ) in the fourth quarter, within the 1%–3% target range.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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