On the 7th of February, the Reserve Bank of Australia raised the cash rate for the 9th meeting in a row by 25bp to 3.35%. The decision was made in response to the record 7.8% YOY December quarter inflation figure – the highest since 1990. Additionally, While the rate rise was broadly anticipated by economists, the board’s outlook that ‘further increases in interested rates’ would be needed was more hawkish than expected. With upward market momentum already weakening, the AUS200 tanked 0.46%, triggering a correction that continued today.

As global and domestic inflation remains very high on the back of strong domestic demand and tight labour market conditions, likely, the RBA will not be satisfied to cut rates until these pressures have eased off. As of the 10th of February, the bank’s near-term inflation forecasts were upgraded with trimmed mean inflation expectations rising by 50bp to 4.3% at year-end. However, the RBA has reassured in its February statement that ‘medium-term inflation expectations remain well anchored. The ASX Interbank Cash Rate Futures Implied Yield Curve indicates that Implied yield will peak at 4.03% in August 2023, representing a further 65bp increase from the current cash rate and potentially more pain in the market. On a more positive note, the RBA expects that slowing domestic demand and global factors will help curb inflation, and indeed, Australian retail sales volume in Q4 dipped for the first time in 2022.

The Central bank’s rate rise came at a time when the AU200 had tested and was rejected by resistance at the 7600 level. Since the all-time high of 7633 in August 2021, this is the 3rd rejection from these levels. A minor correction is imminent, ensuing from the overbought conditions of the RSI 14 on the daily chart, the fading of buying pressure and indicated by the bearish crossover of the MACD (12, 26) below the signal line. However, it is unlikely that this will remain, even with imminent interest increases. The index remains bullish and currently sits comfortably above the 200-day moving average - a key area of support tested in the first few trading days of 2023. Following the retracement, a retest of the all-time high should plausibly be expected in the mid-term.

Will rising interest keep the AUS200 low?

Feb 15 2023