AUD: Bittersweet hike with stretched positioning – ING

ING’s Francesco Pesole notes the Reserve Bank of Australia (RBA) delivered a split 25 bp hike to 4.10%, initially read as dovish and triggering a sell-the-fact move in AUD/USD before a rebound on Governor Bullock’s comments. ING sees signs of fatigue in the AUD bull market but still expects higher levels, targeting 0.70 in coming weeks and 0.74 by year-end.

RBA split hike and AUD fatigue

"The Reserve Bank of Australia delivered a back-to-back 25bp hike overnight, taking rates to 4.10% in a 5-4 split decision. The division in the board was read as a dovish signal initially by markets (that had priced in around 65% probability of a hike) and caused a correction in AUD/USD, with sell-the-fact kind of price action also playing a role in our view."

"AUD rebounded during Governor Michele Bullock’s press conference, where she clarified the Board’s debate was on the timing of a rate hike (March vs May) rather than on whether to tighten policy, and reiterated some alarmism on inflation."

"Still, we do see some signs of tiredness in the AUD bull market. The swap market remains aggressively hawkish (47bp priced in by year-end), but AUD has lost a bit of beta to rate expectations and is looking more sensitive to risk sentiment. That mirrors stretched long positioning, which requires a flow of positive news to fuel short-term rallies."

"We have just updated our AUD/USD forecasts, seeing 0.70 as a more likely target than 0.71 in the coming weeks. Beyond that, we remain bullish, thanks to AUD’s good carry and economic fundamentals and our expectations of a USD decline. Our year-end target is now 0.74."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)