AUD Weakens Ahead of RBA Rate Decision Despite Hike Being Fully Priced
The Australian Dollar (AUD) has been the worst-performing major currency this week, despite the Reserve Bank of Australia's (RBA) upcoming interest rate hike being all but certain. The AUD/USD exchange rate is currently testing support at 0.7006, down around 1.4% against the US dollar.
While the market has priced in a 25 basis point (bp) rate hike to 4.60%, investors are reducing their long-AUD exposure due to uncertainty over the vote composition and guidance from the RBA. A unanimous decision with hawkish language could stabilize the AUD, but a split vote or softer language would be a significant downside surprise.
The market is not debating whether the RBA will hike on Tuesday, but how much AUD exposure it wants to carry into an announcement whose tone may matter more than the rate move itself. The upcoming decision will also be influenced by the latest labor data and wage price index, which suggest that spare capacity is continuing to build at the margin even as employment still grows.