Forex Market: AUD/USD gains on hawkish RBA minutes, upbeat China macro data

AUD/USD rose half a percentage point on Tuesday, following hawkish RBA minutes and data showing China’s economic recovery gained momentum during the first quarter.

The Reserve Bank of Australia may tighten monetary policy further, the minutes of its most recent meeting showed, since the purpose of pausing rate hikes this month was to allow time to obtain more information.

RBA policy makers had considered another 25 basis point rate hike at the April meeting since Australia’s inflation was still too high and the labor market remained tight.

“Members recognized the strength of both sets of arguments, but, on balance, agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings,” the RBA minutes stated.

The document also revealed the central bank officials remained determined to do what is necessary to bring inflation back down to target.

Analysts expect the RBA to raise interest rates again, potentially by more than one 25 basis point hike, in case price pressures continue to persist.

On the macroeconomic front, data showed on Tuesday China’s Gross Domestic Product had expanded at an annualized rate of 4.5% in the first quarter, while outstripping market consensus of a 4% growth. This has been the sharpest rate of expansion since Q1 2022.

At the same time, Chinese retail sales grew at the fastest rate since June 2021 in March, underpinned by strong growth in sales of gold & silver jewelry, clothing, personal care and cosmetics. Retail sales went up 10.6% year-on-year in March, easily beating a consensus of estimates of a 7.4% growth.

And, Chinese industrial output rose 3.9% year-on-year in March, or at the sharpest rate since October 2022, as growth in manufacturing production and utilities accelerated after the lift of the country’s zero-COVID policy.

China is Australia’s largest trading partner.

Meanwhile, in the United States, data showed yesterday manufacturing activity in New York state had expanded for the first time in five months in April.

Additionally, there was improvement in confidence among single-family home builders for a fourth straight month in April.

Futures markets are now pricing in a 91% chance of the Federal Reserve raising interest rates by another 25 basis points at the upcoming policy meeting in May.

As of 8:49 GMT on Tuesday AUD/USD was gaining 0.51% to trade at 0.6734.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -106.5 basis points as of 8:15 GMT on Tuesday, up from -110.8 basis points on April 17th.