Robust NFP bolsters Fed rate-hike bets as Australian Dollar drops to lowest level since March

• Risk aversion and a firmer US Dollar push AUD/USD down to multi-month lows.
• Expectations of additional Fed tightening gain support as US Nonfarm Payrolls beat estimates.
• After its fifth interest rate increase this year, the RBA indicates it will wait and assess developments.

Selling pressure on AUD/USD persists on Friday as a stronger US Dollar and subdued risk appetite drag the pair down to levels last recorded in late March. The AI-led equity market sell-off has dampened sentiment, while cautious guidance from the Reserve Bank of Australia (RBA) after this week’s rate increase adds to the pressure. Trading near 0.6858 at the time of writing, AUD/USD is on course to lose more than 2% over the week.

The Greenback is regaining ground on the back of Friday’s strong US employment figures, having faced selling pressure after the US midterm election results. Having hit a five-week trough 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 far outpaced the forecast of 65K. An upward revision put September’s gain at 60K rather than 29K, while an unexpected decline took the Unemployment Rate from 4.2% to 4.1%.

A resilient labour market leaves Federal Reserve (Fed) hawks with little incentive to abandon further tightening, particularly with inflation above the central bank’s 2% target and energy costs presenting additional upside risks. According to the CME FedWatch tool, traders assign an 80% probability to a rate increase in December.

In Australia, borrowing costs reached their highest point since 2008 after the RBA lifted its cash rate by the expected 25 basis points (bps) to 4.85% on Tuesday. Policymakers have now raised rates five times this year in their effort to contain inflation driven by higher Oil prices.

An explicit reference to raising rates further if necessary was removed from the central bank’s guidance. As Governor Michele Bullock put it, it was “probably best to pause and assess incoming data.”

Could a cut follow the RBA’s dovish hike? OCBC sees easing as the likely next move

For analysts at OCBC Group Research, the RBA’s latest increase came with a justification that “inflation remains elevated and recent data indicate that it is broadly based.” Yet 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,” and to evidence of their effects: “the economy is slowing, housing prices have fallen significantly and the unemployment rate has risen.” This assessment leads OCBC to conclude that “we expect no more hike in this cycle, and the next policy move is likely to be a cut.”