The Australian dollar emerged as the best performing currency among the G10 following the Reserve Bank of Australia's (RBA) unexpectedly hawkish policy update, according to MUFG. The currency strengthened by around +0.7% today against the US dollar and +0.5% against the New Zealand dollar.
The main catalyst was the RBA's surprise decision to increase their policy rate by a further 0.25 percentage point to 4.10%. In the policy statement accompanying the decision, the RBA indicated that inflation remains "too high", and the additional interest rate increase aims to provide greater confidence that inflation will return to the target within a reasonable timeframe.
Expressing concern over "very high" and "very persistent" services price inflation overseas, similar to other major central banks, the RBA emphasized that it will closely monitor the evolution of labour costs and firms' price-setting behavior. The RBA also continued to signal that "some further tightening" of monetary policy may be necessary depending on how the economy and inflation evolve. This counters market expectations that the RBA had concluded its hiking cycle.
MUFG believes this development supports their long AUD/NZD trade recommendation (OPEN @ 1.0870, TARGET @ 1.1200), which is set to benefit from the growing policy divergence between the RBA and the Reserve Bank of New Zealand (RBNZ) in the near term. Unlike the RBA, the RBNZ recently strongly signalled the end of their rate hike cycle after raising their key policy rate to a peak of 5.50%.
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