Australian Dollar reclaims three-year high against US Dollar on hawkish RBA bets

Australian Dollar Price This week

The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies this week. Australian Dollar was the strongest against the Japanese Yen.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.19%	-0.51%	0.62%	-0.04%	-0.70%	-0.46%	-0.34%
EUR	0.19%		-0.31%	0.81%	0.16%	-0.52%	-0.26%	-0.13%
GBP	0.51%	0.31%		1.29%	0.47%	-0.24%	0.05%	0.19%
JPY	-0.62%	-0.81%	-1.29%		-0.65%	-1.29%	-1.01%	-0.95%
CAD	0.04%	-0.16%	-0.47%	0.65%		-0.66%	-0.36%	-0.29%
AUD	0.70%	0.52%	0.24%	1.29%	0.66%		0.26%	0.39%
NZD	0.46%	0.26%	-0.05%	1.01%	0.36%	-0.26%		0.13%
CHF	0.34%	0.13%	-0.19%	0.95%	0.29%	-0.39%	-0.13%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).

In the policy meeting earlier this month, the RBA hiked its Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% and kept the door open for further raises, citing upside inflation risks.

Traders are pricing in roughly an 80% chance that the RBA will raise interest rates in its May policy meeting, Reuters reported. Hawkish RBA prospects have been boosted by higher-than-expected growth in the Australian Consumer Price Index (CPI) data for January.

The data showed on Wednesday that Trimmed Mean CPI grew at a faster pace of 3.4% Year-on-Year (YoY) against estimates and the prior reading of 3.3%. Meanwhile, the headline inflation remained steady at 3.8%, while it was expected to cool down to 3.7%.

On Wednesday, RBA Governor Michele Bullock said in a fireside chat at Melbourne University, “Economy is in quite a good position, and we [RBA] have to be patient on judging policy.”

In the United States (US), the uncertainty over the trade policy outlook after the Supreme Court’s (SC) ruling has weighed on the US Dollar. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower to near 97.50.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.