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Australian Dollar strengthens as hot inflation data boosts RBA rate hike bets
- Australia’s annual CPI jumped to 4.3% in September, topping forecasts and exceeding the RBA’s 2–3% target.
- Traders boosted odds of a November RBA rate hike to 78% following the hotter-than-expected inflation report.
- RBA Governor Bullock warned inflation remains far too high, though gave no firm guidance on policy action.
AUD/JPY extends its gains for the fourth successive day, trading around 111.30 during Asian hours on Wednesday. The currency cross gains support as the Australian Dollar (AUD) receives support following the release of the domestic Consumer Price Index (CPI) report.
Australia’s CPI inflation rose to 4.3% year-over-year in September, up from 4.0% in August and slightly above the market forecast of 4.2%. On a monthly basis, the CPI climbed 0.8%, accelerating from the previous 0.4% increase and topping expectations of 0.7%. Meanwhile, the Trimmed Mean CPI, a key measure of underlying inflation, increased 0.3% month-over-month and advanced 3.7% annually.
This surge pushed inflation further beyond the Reserve Bank of Australia’s (RBA) 2–3% target band, significantly boosting expectations for an interest rate hike at the RBA's November 3 meeting. In response to the data, traders increased the probability of a November rate hike to 78%, up from 70% prior to the report. RBA Governor Bullock noted that inflation remains far too high and emphasized that overall demand continues to outpace supply, though she offered no explicit guidance regarding the upcoming board decision.
The Japanese Yen (JPY) faces headwinds against its major peers due to rising crude oil prices, which place renewed cost pressures on major energy-importing economies. Oil prices rose as global financial markets tracked ongoing election results in Israel that could shift the course of the Middle East conflict.
Exit polls suggest a tightly contested election, showing Prime Minister Benjamin Netanyahu tied with opposition leader Gadi Eisenkot, leaving neither bloc with a clear majority as counting continues. Despite the deadlock, the preliminary results point to diminishing support for Netanyahu, who has been a dominant force in Israeli politics while leading the country through nearly three years of conflict.
Looking ahead, market participants are keeping a close watch on key central bank meetings scheduled for this week. Both the Federal Reserve and the Bank of Japan are widely anticipated to hold interest rates steady, while investors evaluate the likelihood of potential policy adjustments in December.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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