AUD/USD: Australian dollar might soften only moderately – Wells Fargo

Analysts at Wells Fargo forecast the AUD/USD pair at 0.7100 by the end of the second quarter, at 0.6900 by year-end and at 0.6800 by the first quarter of next year. They warn risks are tilted to the upside. 

Key Quotes: 

“After a steady rebound in growth in Q4-2021, labor market and activity trends during 2022 suggest solid economic fundamentals for Australia's economy amid building inflationary pressures.”

“The RBA raised its Cash Rate by 25 bps to 0.35% at its May monetary policy meeting, citing a resilient economy with inflation that has risen faster and higher than previously expected, as well as progress toward full employment and wage growth. The move surprised many market participants, given the consensus forecast for a hike of only 15 bps (…) The minutes indicated the RBA will review the size of its rate hikes again based on new information each month.”

“Our base case is for the Australian dollar to weaken moderately in the quarters ahead. However, we believe the risks are tilted to the upside, and it is possible that there will be a smaller decline in the currency than our base case forecast suggests.”

“More persistently elevated underlying inflation could prompt the Reserve Bank of Australia to raise rates faster than currently expected, which would be supportive of the currency.”

“In this more favorable scenario, the AUD/USD exchange rate might soften only moderately, perhaps not weakening much below the $0.6900 level.”