AUD/USD: RBA policy and tensions with China to cap the aussie at 0.76-0.77

The Reserve Bank of Australia (RBA) extended its QE programme this month, with one eye on the value of the AUD. AUD assets have been the target of carry trades for a long time and RBA Governor Lowe appears very mindful of this. The RBA would like to see increased wage inflation, in contrast, various market voices are sounding cautious about asset price inflation. All in all, economists at Rabobank stick to their forecast of 0.76-0.77 on AUD/USD in the coming months

Key quotes

“We maintain our view that RBA policy combined with concerns about trade tensions with China will keep a lid on AUD/USD. We retain our forecast that a 0.76-0.77 trade range may contain most activity in the coming months.”

“The policy measures taken by the RBA this month may have wrong-footed AUD bulls. However, the outlook for AUD/USD will also be determined by other factors. These include China/Australia trade tension, which we expect will weigh moderately on the AUD this year and on the relative pace of reflation in the US and Australia economies.”

“The RBA is forecasting that the economy should regain its end-2019 size by the middle of this year with 2021 and 2022 GDP growth projections both at a buoyant 3.5%. This outlook suggests scope for the RBA to pull back from its extraordinary policy measures ahead of the Fed, a move which could push AUD/USD higher. However, there are various caveats to this view.”

“The RBA has made it clear that it will not increase the cash rate until actual inflation is ‘sustainably within the 2 to 3 percent target range’ and it specifies that this will require wage inflation to push ‘materially higher’. The implication is that rates in Australia are set to remain low for a long time.”

“Given that monetary policy is a blunt tool and given Australia’s failure to produce any meaningful wage inflation for years, it is also questionable if the RBA can really achieve a ‘material’ increase in wages without structural changes in the labour market. In many respects QE will be an experimental period for the RBA.”

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