The RBA delivered a 25 bp rate hike and indicated that it plans to deliver at least a 50 bp tightening in 2023 driving terminal rate to 3.6%. There were no bullish implications for AUD as the RBA’s decision was priced in, with market participants focusing on the recession risk in the economy of key trading partner, China. Markets are gradually rolling back dovish Fed expectations, the implied terminal rate on federal funds is approaching 5% again. Eurodollar is stabilizing before a possible next leg down. 

A wave of risk appetite amid the easing of Covid measures in China failed to go beyond Asian markets. An upside surprise in the US ISM services data (56.5 vs. 53.3 expected) capped risk demand, Fed rate futures are gradually repricing terminal rate at 5% in 2023. Risk sentiment remains generally fragile.

The dollar has trimmed down recent decline, mainly against the Japanese yen, where the yield differential factor is a significant driver of the USDJPY, as well as against currencies showing a correlation with global business cycle fluctuations (GBP, AUD, NZD, CAD). USDJPY could test 140 ahead of the Fed meeting as recent incoming US data starting with the NFP reduce chances of a dovish shift in Fed policy in December. USDCNY looks set to retest the 7.00 handle and the probability of a breakout is increasing.

The position on the US dollar is now more or less balanced, the factor of squeezing long positions out of the market has almost exhausted itself, and a further decline in the dollar will be possible if the economic prospects of the main opponents improve. However, the number and depth of potential risks (primarily related to energy security) cap downside potential in USD.

The economic calendar today is not particularly remarkable, the blackout period before the Fed meeting next week leaves the markets without catalysts of volatility associated with the comments of the US Central Bank officials.

The potential for a rally in European currencies is markedly limited as investors try to take time to assess the impact of the imposed price cap on Russian oil. Given the expected decrease in temperature in Europe this week, the risks of price shocks in the energy market are growing, which also constrains demand for these currencies.

The RBA raised the rate, vaguely announcing further plans for tightening and the AUD reacted rather restrainedly. The technical chart for AUDUSD indicates a strong resistance zone around 0.6850-0.6900 (breakout of the medium-term bearish trend and approaching the upper limit of the long-term bearish trend) – from the new year, investors could start selling from this zone: