The Reserve Bank of Australia on Tuesday rose the key interest rate by 25 basis points, below the market consensus of 50 bps. The Australian dollar initially dropped but then rebounded. AUD/USD is hovering around 0.6500, marginally lower for the day. Analysts at Rabobank consider the AUD/USD could drop back to the 0.64 area in a one to three months period and then could rise toward 0.69 in the middle of 2023. 

Key Quotes: 

“Today’s decision by the RBA to surprise the market with a smaller than expected 25 bp rate hike brought relief to the Australian stock market.  It may also have brought relief to other ‘smaller’ G10 central banks who have been caught up in rush of large incremental rate hikes in recent months probably designed to prevent their currencies falling too far against the mighty USD.  Unsurprisingly, AUD/USD did initially drop back on the news of the RBA’s policy decision this morning, though it is now trading off its lows.”

“Various models suggest that the AUD is far less undervalued vs. the USD than the majority of other G10 currencies, while Australia’s CPI inflation rate is at the lower end of the range of G10 economies.  This likely afforded the RBA with the breathing room to move away from large incremental rate hikes.  That said, the trigger for a more conservative pace of policy tightening is likely rooted in the Australian property market.”

“We retain our view that AUD/USD could dip back to the 0.64 region on a 1-to-3-month view, with scope to recover to 0.69 in the middle of next year.”

“Australia’s current account surplus, strong terms of trade and positive growth outlook are supportive AUD factors.  Although AUD/USD may struggle to hold its own vs. the mighty USD on a 1-to-6-month view, we see scope for a recovery into the middle of next year.”