RBA Minutes Suggest Higher Rate Hike Risks as AUD Performs Well

The Australian dollar maintained its stability yesterday amidst conflicting market forces. Natural gas prices declined by 3-4% in Europe, which is a negative sign for AUD as Australia is the second-largest global exporter of liquefied natural gas (LNG). Additionally, tensions between China and the US pose risks to Australia's economic growth.

The minutes from the Reserve Bank of Australia's August meeting revealed that several members believed it was possible that inflation risks would materialize, necessitating further monetary tightening. This suggests that the market may be underestimating the likelihood of a rate hike by the RBA. In fact, the data indicates that a pre-emptive rate hike was considered at the meeting, which would have been a significant surprise given the market's expectations.

The release of monthly CPI data yesterday reinforced the view that the RBA may be more proactive than currently anticipated. The annual inflation rate slowed from 3.8% to 3.5%, but the trimmed mean YoY rate remained unchanged at 3.6%. This points to continued RBA concerns about inflation, which bodes well for AUD performance in current market conditions.

However, MUFG Research notes that the risks are shifting, and AUD may be starting to look over-extended relative to the 2-year AU-US swap spread. Any disruption to risk or a spike in FX volatility could see AUD suffer more than most.