Given additional room for RBA-ECB monetary policy expectations to diverge, we anticipate further currency strength against the EUR until the end of the year. Against the USD we expect the currency to remain stable.
RBA easing expectations have been falling considerably since central bank Governor Stevens indicated that lower interest rates would have only limited impact on growth prospects. As such, he reaffirmed that there is little scope for it to consider a more dovish monetary policy stance.
It must be noted too that he stressed that a more dovish monetary policy stance would have only limited currency impact. In the months ahead, we expect improving growth momentum to become reflected more in strengthening labour market conditions. If so, a rising upside risk to inflation may well make a case for investors’ central bank rate expectations to increase, to the benefit of the currency.
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