The Reserve Bank of Australia (RBA) rose rates by 50 bps on Tuesday to 0.85%. Analysts at Wells Fargo expect the RBA to deliver another 50 bps rate hike in July to help tame inflation, before reverting to the more typical 25 bps increments in August, November, and December, which would bring the Cash Rate to 2.10% at the end of 2022. They expect the Australian dollar to soften against the US dollar over the medium-term as the RBA will still lag behind the Federal Reserve.
“The Australian economy has shown solid economic trends this year, including resilient growth and a tight labor market. Underlying inflation has also accelerated above the Reserve Bank of Australia's (RBA) medium-term target. We expect inflation to remain elevated in the coming quarters and see potential for wage growth to quicken as well.”
“Even with this series of steady monetary tightening, we expect that RBA rate hikes will still lag behind the Federal Reserve's and fall short of the tightening currently priced in by market participants. As a result, we expect the Australian dollar to soften against the U.S. dollar over the medium-term.”
“We forecast the AUD/USD exchange rate to reach 0.6900 by the end of 2022. That said, in our view the risks could be tilted toward less weakness in Australia's currency than we currently anticipate, as inflation pressures could lead the Australian dollar to experience a more gradual pace of depreciation than our base case forecast currently projects.”
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