• Aussie jumps after RBA’s shock hike, loonie buoyed ahead of BoC decision
• US dollar on the backfoot after disappointing ISM services PMI
• Oil and stocks struggle amid economic and rate path uncertainty

The Reserve Bank of Australia caught markets off guard for a second straight meeting on Tuesday, hiking the cash rate to a new decade high of 4.10%. The decision comes after inflation in Australia began to creep up again in April, underlining the difficult battle central banks face in containing spiralling prices.

Although there had been some expectations that the RBA would raise rates again, especially after the announcement that the country’s minimum wage will increase by 5.75%, most investors thought that policymakers would take another pause in June so soon after May’s hike. But the RBA isn’t done yet as the statement flagged “some further tightening”, with futures markets moving quickly to fully price in a 25-basis-point increase by September.

The Australian dollar hit a three-week high of $0.6685 immediately after the decision and there could be more gains in store for the aussie if tomorrow’s Q1 GDP estimate impresses. The Canadian dollar is also riding on the back of the aussie’s boost as investors are upping their bets that the Bank of Canada might follow in the RBA’s footsteps on Wednesday to raise its overnight rate.

The loonie is currently trading near a four-week high of around C$1.34 to the greenback.

With other central banks being forced to ‘unpause’, Fed officials have been careful to describe a potential pause in June as ‘skipping’ a rate hike, to avoid sending a signal to the markets that the tightening cycle is over. However, whilst there’s still a sizeable probability of a rate rise in July, those odds have started to diminish following the weaker-than-expected ISM non-manufacturing PMI yesterday.

Services activity in the US almost stagnated in May according to the ISM survey and employment fell for the first time since December, suggesting that the labour market isn’t as strong as indicated by the official payrolls report. The prices paid index also fell sharply, further supporting the view that the Fed will skip a hike next week when it meets.

With no other major data releases or Fed speakers on the agenda for the remainder of the week, the US dollar doesn’t have a lot going for it, although it has managed to come off earlier session lows. Fierce fighting in Ukraine might be attracting some safe haven demand as the Japanese yen is mostly higher too on Tuesday.

Overall, markets appear to be in wait-and-see mode, not just ahead of next week’s US CPI numbers and Fed policy decision, but also because as we move into the second half of 2023, investors remain none the wiser about where interest rates will peak and if there’s going to be a recession or not.

US equities closed lower on Monday and futures are flat amid the absence of major drivers. Apple could be a drag on Wall Street today as traders deemed the $3,500 price tag for the company’s new mixed reality headset as too high. The stock had spiked to an all-time high in the run-up to the product’s launch.

Even shares in Asia struggled despite speculation that authorities in China are considering new measures to shore up the troubled property sector and news that US and Chinese officials held talks to improve ties.

There are growing reports that China is in the midst of a new Covid wave and this could be holding back risk appetite, as well as weighing on oil demand.

Oil futures are trading about 2% lower today, more than reversing Monday’s gains after OPEC+ announced a surprise cut in output. The clouded outlook is one of the reasons Saudi Arabia decided to make a voluntary cut, but the reduction of 1 million barrels a day doesn’t seem to have eased investors’ concerns much.