Australian inflation boosts rate hike expectations, putting pressure on Aussie dollar bears

⑴ After the release of Australia's third-quarter inflation data, market expectations for a Reserve Bank of Australia rate hike turned more hawkish, putting pressure on Australian dollar short positions. ⑵ Currently, the market estimates an 85% probability that the Reserve Bank of Australia will raise rates to 4.85% next week, up from 69% before the inflation data was released. ⑶ Following the data release, the Australian dollar jumped to a five-week high of 0.7055 against the US dollar, 1.6 cents higher than the 15-week low hit after weak employment data on October 15. ⑷ The Australian dollar surged 2% against the New Zealand dollar to 1.26, hitting a 13-year high after the Reserve Bank of New Zealand unexpectedly kept its policy rate unchanged at 2.75%. ⑸ In the five weeks ending October 20, net short positions in the Australian dollar increased from 38,906 contracts to 127,292 contracts, more than tripling. ⑹ Overall, the inflation data reversed the market's pricing of the Reserve Bank of Australia's policy path, with short covering supporting the strength of the Australian dollar. Going forward, attention should be paid to next week's rate decision and policy moves by the Reserve Bank of New Zealand and their impact on cross currency pairs.