AUD/NZD fails to sustain above 1.1000 as focus shifts to RBA policy

• AUD/NZD has failed to sustain itself above 1.1000 ahead of RBA monetary policy.
• The historic rise in the Australian inflation rate has made RBA policymakers' job more tedious.
• A decline in NZ labor cost data could impact households’ sentiment.

The AUD/NZD pair has failed in holding itself above the psychological resistance of 1.1000 as investors have shifted their focus toward the monetary policy announcement by the Reserve Bank of Australia (RBA). The cross remained in a negative trajectory last week after the Australian Bureau of Statistics reported a historic surge in the quarterly inflation data.

A recent spike in the inflation rate has put RBA policymakers in dilemma whether to advocate for the continuation of the 25 basis points (bps) rate hike as announced in October or return to half-a-percent rate hike. The inflation rate in the third quarter rose to 7.3%, which has made the job of RBA Governor Philip Lowe more tedious as economic prospects can’t be ignored while handling the inflation mess.

Economists at ANZ Bank cited that “A 50 bps rise in November is possible, but we think the RBA will prefer to hike more frequently than shift back to 50 bps, given the reasoning behind the decision to go 25 bps in October.”

While analysts at Westpac carry a contrary view and see a rate hike of 50 bps. “The RBA will lift the cash rate by 50 bps, to 3.10%. This is a non-consensus view – most commentators anticipate a move of 25 bps. It is significant that Q3 inflation data was much higher than anticipated. The 1.8%qtr, 6.1%yr increase in trimmed mean inflation was a shock result. It demands a more urgent response from the RBA.

On the NZ front, Wednesday’s employment data will be of utmost importance. The Employment Change for the third quarter is seen at 0.5% vs. the prior release of 0%. While the jobless rate may trim to 3.2% vs. 3.3% released earlier. However, the catalyst that could impact the sentiment of households is the labor cost index, which is seen lower at 1% against the prior release of 1.3%.

Mounting inflation in the kiwi economy demands higher earnings for households to make payouts of inflation-adjusted goods and services. Lower expansion in earnings would be unable to offset higher expenses, which could weigh on kiwi bulls.