RBA moves again, but is that it?

Peter Dragicevich, Currency Strategist, APAC

• Push/pull forces. Rebound in tech stocks boosted US equities. US mid-term elections in focus today. Potential for bursts of USD volatility over period ahead.
• RBA hike. RBA raised rates to 4.85%, high since 2008. AUD slips back. Worsening growth outlook & split RBA vote suggests hiking phase may be over.

Global Trends

There have been a few intermittent gyrations across markets over the past few sessions as macro and geopolitical factors washed through. On net, a tentative revival of the AI trade boosted US equities overnight (S&P500 +0.3%, NASDAQ +0.8%). Bond yields ticked up (US 10yr +5bps to ~4.96%), oil whipped around in a wide range on positive and negative headlines related to the US/Iran conflict (brent crude now ~US$104/brl), and the USD index nudged up slightly. EUR is treading water around the lower end of its ~17-month range (now ~$1.1191), USD/JPY edged higher (now ~158.74), the NZD dipped (now ~$0.5585) after the Q3 jobs report showed another unexpected rise in NZ unemployment, and the AUD underperformed post the RBA rate hike because of policymaker hints the tightening cycle may close to, if not already at, an end (now ~$0.6963).

Attention today and over the next few sessions is likely to be on the outcome of the US mid-term elections. The mid-terms are often viewed as a referendum on the perceived performance of the sitting President. It isn’t unusual for the President to lose ground. Since 1946, the President’s party has lost an average of ~26 seats in the House and a few in the Senate in midterm elections. All 435 seats in the House are being voted on, but only 35 of the 100 Senate seats are being contested. The Republican’s currently hold a slim majority in the House and Senate. Given the small margins and President Trump’s disapproval rating, polling and betting odds suggest the Democrats are likely to flip the seats needed for a House majority, and could also gain control of the Senate.

The vote counts are likely to start coming out from ~10am AEDT. If majority control comes down to a small number of seats, it is possible the final result won’t be known for several days. Nothing is guaranteed. Election surprises have happened before. Even if the Democrats end up gaining control of both chambers, the size of the majority will be important. A big majority in both might mean there is more regulation on the tech sector and/or reduce the prospect of further fiscal spending boosts to the US economy. This could see the USD weaken a little. While a slim gap (particularly in the Senate) could end up meaning Republicans are in a blocking position, potentially setting up another debt ceiling fight and government shutdown showdown in 2027. In our view, this type of ‘surprise’ outcome might see the USD strengthen a bit. As could an escalation in the US/Iran conflict due to ‘safe haven’ demand and/or the US’ standing as a ‘net energy exporter’.

Trans-Tasman Zone

The AUD has extended its early November pull-back (now ~$0.6963), with the AUD also underperforming on the cross-rates over the past 24hrs with falls of ~0.3-0.5% recorded against the EUR, GBP, and CAD. As expected the RBA raised interest rates by another 25bps yesterday which increased the cash rate to 4.85%, a high since late-2008. However, as this was largely factored into the Australian interest rate curve, attention was on the RBA’s updated outlook and rhetoric.

While core inflation is only projected to get back down into the RBA’s 2-3% target band by late-2027, growth is also set to be weaker (the economy is set to slow to just 1.3%pa by H2 2027) and unemployment is forecast to be higher (rising above 5% in 2028). This more challenging backdrop meant there was a split 6-3 Board vote in favour of yesterday’s hike. The diverging Board views, coupled with the multiple hikes put through which are only just starting to work their way through the system, and worsening domestic trajectory suggests the RBA (hopes) it is in the tightening ‘endgame’. It needs to be remembered that ‘restrictive’ monetary policy means downside growth risks and the odds of a recession lift the longer they are in place.

We think that for the AUD perceptions the RBA may be far closer to the end than the beginning of its rate hiking phase may generate more short-run headwinds. We believe the more worrisome domestic economic backdrop, lingering pockets of global geopolitical uncertainty, and relatively more aggressive outlook for other central banks from here, may see the AUD weaken against currencies such as the EUR, NZD, JPY, and GBP over the next few months/quarters. For AUD/USD, push/pull forces point to bursts of intermittent volatility. As discussed before, a higher RBA cash rate should translate to a higher average range in the AUD relative to a few years ago (i.e. ~$0.69-0.71 compared to ~$0.6525 averaged over 2024/25), but not more AUD upside potential given the domestic economic story. For more see Market Musings: RBA – the hike that stops the nation.

Across the Tasman, the NZD (now ~$0.5585) has been weighed down this morning by a softer Q3 NZ jobs report. Employment growth wasn’t as strong as predicted, and unemployment rose to 5.7%, a multi-year high. The result dampened prospects of a RBNZ rate hike in December (now deemed a ~50/50 chance). The NZ General Election is being held this weekend. Swings in the polls away from the current government have also dragged down the NZD recently. The NZD may remain on the backfoot near-term, however a lot of negatives already look to be factored in, in our view. We believe the NZD is undervalued given it is tracking ~4 cents below our ‘fair value’ estimate. AUD/NZD also looks stretched compared to metrics like yield spreads and on broader valuation models.