Robust NFP strengthens Fed rate hike bets as Australian Dollar slides to lowest level since March

• AUD/USD falls to multi-month lows as US Dollar gains and risk aversion put pressure on the Aussie.
• An above-forecast US Nonfarm Payrolls reading reinforces expectations of additional Fed tightening.
• Following its fifth interest rate increase this year, the RBA indicates it will wait and assess developments.

At around 0.6858 at the time of writing, AUD/USD is on course for a weekly decline of more than 2% as Friday’s losses take the pair back to levels last recorded in late March. The decline reflects a stronger US Dollar, subdued risk appetite amid the AI-led equity sell-off and cautious guidance from the Reserve Bank of Australia (RBA) after this week’s rate increase.

Friday’s robust US employment figures have helped the Greenback regain ground following the pressure brought by the US midterm election results. Having reached a five-week low near 101.24 earlier this week, the US Dollar Index (DXY) now stands around 102.15. The index measures the currency against a basket of six major peers.

October’s US Nonfarm Payrolls (NFP) increase of 165K was well above the forecast of 65K. Alongside an upward revision to September’s gain, from 29K to 60K, the Unemployment Rate recorded an unexpected decline from 4.2% to 4.1%.

A resilient labour market leaves Federal Reserve (Fed) hawks with little incentive to step back from additional tightening, given inflation above the 2% target and further upside risks from energy costs. According to the CME FedWatch tool, market pricing assigns an 80% probability to a rate increase in December.

Tuesday’s widely expected RBA increase of 25 basis points (bps) brought the cash rate to 4.85%, lifting Australian borrowing costs to their highest since 2008. This was the fifth rise this year, with policymakers seeking to contain inflation driven by higher oil prices.

An explicit reference to further rate increases if necessary was removed from the central bank’s guidance. In Governor Michele Bullock’s words, it was “probably best to pause and assess incoming data.”

RBA delivers dovish hike as OCBC expects a cut to be the next move

While OCBC Group Research analysts note that the RBA defended its latest increase on the grounds that “inflation remains elevated and recent data indicate that it is broadly based.”, they draw attention to the Bank’s acknowledgement that “the increases in the cash rate target since the beginning of the year have tightened financial conditions,”. The effects are already apparent, with the Bank observing that “the economy is slowing, housing prices have fallen significantly and the unemployment rate has risen.” In light of this, OCBC’s conclusion is that “we expect no more hike in this cycle, and the next policy move is likely to be a cut.”