Australian Dollar "To The Moon" Thanks to "Rate Hike" Signal

AUD/USD hit a record high since June 2021 during the Asian session, although further rallies are likely to be weighed down by overdone RBA interest rate expectations.

The Australian dollar rocketed more than 1.2 percent to the 0.7630 range against the US dollar in trading this Tuesday (5/April), thanks to the latest hawkish policy announcement by the Australian central bank (RBA). AUD/USD hit a record high since June 2021 during the Asian session, although further rallies are likely to be weighed down by market expectations of the RBA's rate hike going too far.

AUD/USD Daily chart via TradingView

The RBA today kept rates steady at 0.10%, but made no mention of any "patience" waiting for further labor market improvements to raise rates in the future. Instead, the RBA signaled readiness to start raising interest rates in the next few months if inflation and wages data remains impressive.

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RBA Governor Philip Lowe conceded that current payrolls were below the central bank's expectations. However, Australia's unemployment rate has fallen to a record low of 14 years and is likely to drop further to below 4 per cent. In addition, rising Australian inflation is expected to continue and strong commodity prices will continue to enrich the country's coffers. In other words, the outlook for the Australian economy is getting better.

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Financial markets now expect the RBA to raise interest rates 6 times in 2022, bringing rates up from the current 0.10% rate to nearly 1.7% in December. If so, the RBA should start raising interest rates in June or July and then announce successive "rate hikes" every subsequent month until the end of the year.

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Some analysts consider the market's expectations to be too exaggerated and unrealistic. Nevertheless, the RBA's attitude today surprised the market and succeeded in becoming a positive catalyst for the Australian dollar exchange rate in the short term.

"The RBA is taking its 'patient' narrative out of guidance for (rates) hikes, so that means the RBA will start raising rates at some point in the next few months (likely in June)," said Joseph Capurso, strategist at Commonwealth Bank of Australia, as reported by Reuters.