ANZ says RBA hike bets have cooled, but 3.7% core inflation will keep it cautious
The Australian dollar (AUD) is under pressure as cooling expectations for future hikes by the Reserve Bank of Australia (RBA) align with rising US yields and a hawkish Fed stance. Per the full note from ANZ, while recent core inflation figures stood at a sizeable 3.7%, the predominant concern for the RBA is sticky services inflation, which may limit rate cut prospects in a slowing economy. With no imminent catalysts on the calendar and given the prevailing market dynamics, the outlook for the AUD remains cautious amidst strong dollar momentum.
What the desk is arguing
The Australian dollar is increasingly vulnerable as the market recalibrates RBA hike expectations concurrently with a strengthening US dollar. Per the full note from ANZ, the cooling economic landscape in Australia alongside elevated services inflation—which rose 1.0% quarter-on-quarter—points to sustained caution from the RBA despite the case for imminent rate hikes diminishing.
The trimmed mean inflation reading of 3.7% year-on-year exceeds the RBA's target range, illustrating persistent inflationary pressures, particularly in the services sector. This mix of higher rates for US bonds and a weakening AUD in this environment suggests that further dollar strength could ensue, amplifying the AUD’s downside risk.
Where it sits in our coverage
With a consensus target for AUD/USD at 1.075, there’s a notable spread among major firms regarding the outlook. Current dec-26 targets include: - jpmorgan: 1.10 - bofa: 1.04
Our desk’s view aligns closely with the upper range of this consensus, highlighting ongoing concerns about Australian inflation while acknowledging a cautious Federal Reserve.
How other firms see it
Firms such as jpmorgan and bofa present mixed views; while jpmorgan is aligned with higher targets due to expected continued inflation pressure, bofa foresees a more conservative path given economic slowdowns impacting the RBA's monetary policy.
The trajectory ofAUD/USD is likely influenced by broader market patterns including US Treasury yields and Federal Reserve rate decisions, shaping the narrative around AUD stability.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01AUD under pressure with RBA rate hike expectations fading.
- 02Core inflation at 3.7% poses a challenge for RBA easing.
- 03Rising US yields could amplify AUD's vulnerabilities to further dollar strength.
- 04Market services inflation indicates strain on domestic capacity.
Market implications
Watch for AUD/USD support around 1.04 as a critical level. Traders should focus on positioning ahead of upcoming US economic releases that could shift sentiment further in favor of the USD. The market sentiment surrounding US Federal Reserve policies remains crucial in shaping the AUD's trajectory.
Risks to this view
A resurgence in RBA hawkishness, driven by sharper-than-expected inflation readings, could invalidate the current cautious outlook. Additionally, stronger global economic data or any signal of a shift in Fed policy could provide support for the AUD, contradicting the prevailing bearish sentiment.
Cooler RBA hike expectations take away one source of support for the Australian dollar, at a time when US yields are rising and the Fed is on a hiking path . That leaves the AUD exposed to further dollar strength. Sticky services inflation should limit how far Australian rate expectations can fall, though, which caps the downside for front-end bond yields.
Lower oil prices help Australian headline inflation but do little for the domestic services pressures ANZ is focused on, so the RBA’s cautious stance looks likely to persist. --- Growth is cooling, but services inflation isn’t, and that keeps the RBA from relaxing even as the case for another hike fades. Summary: ANZ economist Siddhant Kalra says expectations of further RBA rate hikes have cooled as Australia’s economy slows Q3 trimmed mean inflation rose 1.0% q/q and 3.7% y/y, above forecasts and above the RBA’s 2% to 3% target band Market services inflation posted its strongest annual gain since 2024 ANZ links market services prices to domestic capacity pressures It says the strong result will keep the RBA cautious in the coming months Expectations of further interest rate increases by the Reserve Bank of Australia have cooled as signs mount that the economy is slowing. But persistent inflation means the central bank is unlikely to drop its guard, according to ANZ economist Siddhant Kalra.
The pressure shows up most clearly in the RBA’s preferred core measure. The trimmed mean, which strips out the most extreme price moves each quarter, rose 1.0% in the third quarter and 3.7% from a year earlier. That was above forecasts and above the top of the central bank’s 2% to 3% target band.
Market services inflation, which covers prices that depend mainly on local demand and labor costs, posted its strongest annual increase since 2024. Kalra highlighted the services detail as the key point. Market services prices are closely linked to domestic capacity pressures, so they reflect how stretched the Australian economy is, rather than global influences such as oil prices or the currency.
A strong reading suggests demand is still running up against the economy’s limits, which is the kind of inflation central banks find hardest to bring down. ANZ said the strength of the result is likely to keep the RBA cautious in the coming months. That leaves the bank in an awkward position.
Slowing growth argues against more tightening, while sticky underlying inflation argues against signaling that rates have peaked, let alone opening the door to cuts. The global backdrop adds to the tension. Lower oil prices are easing pressure on headline inflation, but central banks elsewhere are leaning hawkish.
The US Federal Reserve is widely expected to raise rates in December after a hotter than expected October inflation report, and the Bank of Japan is also expected to hike. For the RBA, the coming months are likely to be about patience rather than action. Unless services inflation eases, a meaningful shift toward lower rates looks some way off, even if the bar for another hike has risen.
This article was written by Eamonn Sheridan at investinglive.com.
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