From Yuxuan Tang, Asia Head of Rates & FX Strategy at J.P. Morgan Private Bank
The Reserve Bank of Australia (RBA) hiked the cash rate to 4.85%, its fifth hike this year. Markets interpreted the decision as dovish, with significant moves in Australian government bond yields (falling ~10bp across tenors) and AUDUSD down around 0.4%.
There were several dovish signals beneath the headline hike. The decision was 6-3, with the hold camp pointing to falling house prices and rising unemployment. In the statement, the RBA removed its previous guidance that it could increase the cash rate further if needed. Governor Bullock also emphasized that the impact of the last couple of hikes “haven’t even started to flow through yet,” which we think suggests a preference to pause and assess the cumulative impact of tightening.
Our view remains unchanged since September: we have turned more cautious on Australia’s macro outlook and expect the RBA to become a relative dove. The property market downturn and sharp deterioration in consumer sentiment, following both monetary and fiscal tightening earlier this year, constrain the room for further tightening. Against this backdrop, today’s hike is likely to mark the final one of the cycle. If near-term inflation pressures (i.e. another round of ME escalation) ultimately force the RBA to hike again, we think this would only increase the likelihood of a sharper slowdown and bring forward the case for rate cuts at some point in 2027.
Our take on AUD: 0.70 mid-’27 (unchanged), with moderate upside potential in 2H 2027. Over the next 3-6 months, we remain largely neutral and would only look to go long AUDUSD if spot moves below 0.68. Over the medium term, however, high carry, healthy fiscal fundamentals and an off-the-peak US dollar should support the AUD, making it an attractive long leg for carry trades.
Our take on Australian rates and fixed income: We continue to like Australia duration. Even after today’s sizable rally, the rates market still prices around a 40% probability of another hike, which we think leaves room for further repricing if the RBA is indeed done. We also continue to see good value in high-quality AUD-denominated bonds, given attractive starting yields and the potential for capital gains as markets increasingly price downside risks to growth.
