Reserve Bank of Australia Hikes Rates and Sees Another this Year

[Ben Graham]

The sense of anxiety that hung over the capital markets eased today. Equity markets are higher and the meltdown in gold and silver brought in new buying. The US dollar is mostly a little softer, but its upside correction does not appear over. Most emerging market currencies are firmer today, led by the unlikely Indian rupee, which gapped higher following the trade agreement with the US. Meanwhile, there is a partial US government shutdown that will disrupt reporting of economic data, including Friday’s nonfarm payrolls and today’s JOLTS report. 

The Reserve Bank of Australia became the first G10 central bank to raise rates. It lifted the overnight cash rate target 25 bp to 3.85%. Although the RBA wanted to be non-committal about the outlook, its economic forecasts assumed another hike this year, which the market has nearly fully discounted by the mid-year. 

Prices  

G10

• The euro was sold to $1.1780 in North America yesterday. It recovered to almost $1.1825 in late Asia Pacific turnover before being sold to session lows in Europe near $1.1785. The (61.8%) retracement of the euro’s rally from the January 19 low (~$1.1575) is around $1.1765, and the 20-day moving average is about $1.1750. The daily momentum indicators are only turning lower, warning that that correction can run deeper. 

• The dollar closed the gap against the yen that was created with the sharply lower opening last Monday. The gap was found between roughly JPY155.30 and JPY155.65. Yesterday’s high was near JPY155.80, which is slightly over the (50%) retracement of the decline from the January 23 high (~JPY159.25). Today’s high set in Europe is almost JPY156. The next retracement target is near JPY156.50 and the 20-day moving average is a little higher (~JPY156.60). The daily momentum indicators are overextended but look poised to turn higher. 

• Sterling was sold to slightly below $1.3625 yesterday. The halfway point of the rally from January 19 (~$1.3330) to last week’s high (~$1.3670) is near $1.3600. It recovered slightly above $1.3700 today where sellers pounced and sent it back to almost $1.3650. The next retracement target is close to $1.3535, and the 20-day moving average is around $1.3640. Here, too, the momentum indicators are stretched and appear poised to turn lower, suggesting the pullback has more room to run. 

• After posting an outside up day against the Canadian dollar before the weekend, the US dollar extended its upside correction yesterday and poked above CAD1.3700. It nearly met the (50%) retracement of the decline from the January 16 high (~CAD1.3930). The greenback is consolidating firmly in the upper end of yesterday’s range. The next retracement is around CAD1.3760, and the 20-day moving average is about CAD1.3770. The momentum indicators are overextended have not yet completely turned higher. 

• The Australian dollar was sold to about $0.6910 yesterday, a four-day low. The prospect of an RBA rate hike today may have deterred more aggressive sales yesterday. In response to today’s hike, the Aussie raced to $0.7050. Sellers emerged and the Australian dollar fell back to around $0.7000 in early European turnover. It may find support around there and could recover in the North American session. Still, the momentum indicators are rolling over, warning of deeper near-term losses. 

EM

• The Colombian peso led the emerging market currencies higher yesterday. It jumped around 2.25% higher following the pre-week unexpected 100 bp hike in its overnight lending rate to 10.25%. It is punishingly high given around 5.5% CPI at the end of last year. The January report is due at the end of the week. Stronger than expected December economic activity in Chile, helped lift the Chilean peso by about 1%. The Mexican peso showed resiliency. The greenback reached MXN17.5725 where sellers drove it session lows near MXN17.3515. It consolidated around MXN17.40 in a quiet North American afternoon. The dollar pulled back to nearly MXN17.30 today but is consolidating quietly in European turnover. 

• The dollar was sold to a new low against the offshore yuan slightly above CNH6.93 today, having been turned back to CNH6.96 yesterday and the 20-day moving average. The PBOC continues to gradually lower the dollar’s fix. It has not stopped at CNY7.0. Today’s reference rate was set at CNY7.9608, a new low since May 2023. 

• Higher Indian rates after the weekend budget plus central bank intervention helped lift the rupee by around 0.5% yesterday, making it the third strongest emerging market currency. President Trump announced as trade deal with India that will result in a reduction of the US tariff from 25% to 18%. A powerful short squeeze today lifted the rupee by more than 1.35%. The dollar held important psychological support near INR90.00 today. A large gap has been left in its wake. The US dollar’s low yesterday was about INR91.4425. Today’s high was near INR90.5165. The central bank meets Friday, and the key repo rate is 5.25%. 

Other Markets 

• On the heels of the US equity market rally yesterday, Asia Pacific bourse soared today. The Nikkei and Topix were up more than 3%, South Korea’s Kospi jumped 6.8%, and Indian shares are up more than 2.5%. Even Indonesian shares, which have been battered, rose 2.5%. China’s CSI 300 increased by nearly 1.2%. Europe’s Stoxx 600 is up slightly after gaining slightly more than 1% yesterday. US S&P and Nasdaq futures are posting mild gains. 

• Benchmark 10-year yields are higher across the board today. Japan and Australia’s 10-year yield rose 2-4 bp today, while European yields are1-2 bp higher. The 10-year US Treasury yield is firm, slightly below 4.29%. 

• Gold is higher for the first time in three sessions. In those three sessions, gold fell by nearly 14%. It is up a little more than 5% today and is slightly above $4900. Silver is more than 8% higher and probing the $86 area. 

• March WTI is recovering after extending yesterday’s losses. It reached almost $61.10 today before recovering more than a dollar. It is near $62.20 in late European morning turnover. 

Data

• The US December JOLTS data has been delayed due to the partial government shutdown. That leaves January auto sales on tap. They look soft. The Q4 25 average (seasonally adjusted annual rate) was 15.65 mln, the softest quarter since Q3 24. Still, the tariffs and expiration so tax incentives saw the 2025 average pace of 16.12 mln (vs.15.77 mln in 2024 and 15.43 mln in 2023). The median forecast in Bloomberg’s survey anticipates a 15.30 mln pace. Auto sales may be a drag on January retail sales. 

• Due to yesterday’s holiday in Mexico, the January manufacturing PMI will be released today. It is likely to rise from 46.1 in December, the lowest since last April. It would be the first increase since August. The January IMEF surveys also are expected to improve slightly. Mexico reports December worker remittances, the number one source of hard currency inflows. Through November remittances slowed to about $56.5 bln from about $59.5 bln in the same period in 2024. Remittances typically rise in December and last year is not seen to be an exception. The median forecast in Bloomberg’s survey is for $5.161 of remittances in December 2025. While a little better than November’s $5.125 bln, it is less than the December 2024 inflow of $5.223 bln. 

• Ahead of the eurozone preliminary January CPI estimate due tomorrow, France reported its estimate today. On the EU harmonized measure, French consumer prices slipped by 0.4% for a 0.4% year-over-year rate. This follows a 0.1% increase in December and a 0.7% year-over-year pace. Germany reported last week (-0.1% month-over-month and a 2.1% year-over-year rate), as did Spain (-0.7% on the month and 2.5% year-over). 

• Earlier today, the Reserve Bank of Australia raised interest rates. The strength of recent data and hawkish comments by the central bank’s leadership had boosted expectations. The futures market discounted nearly 70% chance of a hike. Another hike is 90% discounted by the end of June. The central bank’s macro forecasts also assume another hike this year.  

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