RBA Rate Hike and the AUD
The Reserve Bank of Australia increased the cash rate this week, a move that was widely expected. As of 3 February, Australian markets are pricing one to two further 0.25% rate hikes by year-end, while the U.S. market is increasingly pricing additional rate cuts by the Fed.
This has resulted in the Australian cash rate sitting above the U.S. Fed’s target range for the first time, on a sustained basis, since 2018.
Source: Bloomberg
What this means for the AUD
Historically, in periods where the Australian cash rate exceeds the U.S. cash rate, this has generally been supportive of a stronger Australian dollar. The AUD has recently broken above US$0.70 for the first time in around three years, and if the current cash rate differential is maintained or widens, a higher AUD trading range (around US$0.70–0.75) is plausible.
Sestante’s portfolio positioning – still on plan
Importantly, this rate rise does not change our portfolio strategy.
> Portfolios remain overweight global duration, reflecting our view that the Fed is likely to make additional rate cuts as part of this interest rate cycle.
> Australian duration over time will likely become incrementally more attractive, and we continue to assess opportunities across fixed interest markets.
> Currency positioning remains unchanged, with approximately 50% of growth assets hedged across most portfolios. We are comfortable with this balance given current conditions.
We continue to focus on risk-adjusted returns and do not make reactive changes in response to individual data points.
If you have any questions, please do not hesitate to contact Antonio Vaiente ([email protected]) or Vilma Attanasio ([email protected]).