Inflation and Interest Rates
Despite the RBA’s decision to leave its Official Cash Rate steady at 3.6% in the December meeting, Governor Michele Bullock indicated no imminent rate cuts. The upcoming Australian Trade Balance data could impact the Australian Dollar’s trajectory.
Meanwhile, the New Zealand Dollar showed firmness against other currencies as the market anticipated the Q4 employment data. Expectations are for a 0.3% rise in employment change and an unemployment rate steady at 5.3%.
The RBA typically makes interest rate decisions at eight scheduled meetings yearly. A rate hike generally supports the Australian Dollar, while a dovish stance can weaken it.
With the Reserve Bank of Australia lifting its rate to 3.85%, we are seeing a clear divergence in monetary policy compared to other central banks. This move has pushed the AUD/NZD exchange rate to a multi-year high near 1.1630. This strengthens the case for continued Australian dollar momentum against the Kiwi dollar in the coming weeks.
Economic Indicators
We saw Australian inflation accelerate to 3.8% in December 2025, which is what forced the RBA’s hand today. In contrast, New Zealand’s latest quarterly inflation data from late 2025 showed a slight cooling to 4.5%, suggesting the Reserve Bank of New Zealand can afford to wait. This growing gap between a re-accelerating Australian inflation rate and a slowing New Zealand one is the key driver for traders.
The immediate focus now shifts to New Zealand’s employment data for the fourth quarter of 2025, due tomorrow. A weak report, confirming a cooling economy, would likely fuel another surge in the AUD/NZD cross. Traders could consider buying near-term call options on the AUD/NZD pair to capitalize on this potential for continued upside.
On Thursday, we will get Australia’s trade balance for December 2025, with consensus pointing to another strong surplus near A$11 billion, similar to figures seen through much of last year. A number this strong would reinforce the view of a robust Australian economy, giving the RBA even more reason to remain hawkish. This suggests the current strength in the Aussie dollar is not just a one-day reaction but has fundamental support.
