Hawkish RBA still heading higher
Summary
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The Australian dollar has been a solid performer in recent months and is up 11% from its October 2022 low. Given recent developments, we believe this positive trend can continue and have adopted a more constructive medium-term outlook for AUD/USD, targeting an exchange rate of $0.7800 by mid-2024.
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In our view, growth in Australia should be sturdy enough to avoid recession, and with inflation still elevated at the highest rate in over 30 years, we do not expect the Reserve Bank of Australia (RBA) to cut rates from now through mid-2024. This is in contrast to our expectation for a U.S. recession in H2-2023 and eventual Federal Reserve easing at the beginning of 2024. Resilient Australian growth and favorable RBA monetary policy dynamics versus the Fed are the main factors that should be supportive of the Australian dollar over time.
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Notably, the RBA raised its Cash Rate by 25 bps to 3.35% at its February monetary policy meeting and signaled additional rate hikes to come. Given some hawkish comments and guidance, we now expect the RBA to deliver two more 25 bps rate hikes in March and April to a terminal rate of 3.85%.
Author
Wells Fargo Research Team
Wells Fargo
