AUD/USD: RBA to be unable to prevent further rises if commodity prices remain high – SocGen

There were two key surprises in the RBA Board’s July statement: the tapering of weekly purchases to AUD4 B per week and the change to the forward guidance by removing “at the earliest.” So, although the Reserve Bank of Australia sounded a little bit more hawkish than expected, economists at Société Générale expect AUD bulls to face hurdles as the Federal Reserve is leading the hawkish camp.

AUD/USD lagging commodity price by miles

“The Australian dollar has gained 4% against the US dollar and less than 1% against the NZD since the RBA's commodity price index hit its end-2015 low. That fall had dragged AUD/USD from well over parity to under 0.75. The rebound initially helped the currency a bit but since 2018 AUD/USD is largely indifferent to commodity prices and follows rate differentials more closely, spending much of last year catching up with the effect of the Fed's move on those. This is now a challenge for AUD bulls, because the RBA seems committed to a strategy of keeping rates down until after the Fed has hiked.” 

“This morning's policy meeting concluded with cautious economic optimism, a mini-tapering of asset purchases to AUD$4 B per week from September onwards (from AUD5 B now), and a suggestion rate hikes aren't likely before 2024.”

“We don't think that the RBA can prevent AUD/USD from rising further if commodity prices remain high, and as the economy recovers from the latest round of lockdowns. But the currency will remain soft enough to ensure that Australia's current account surplus remains sizeable.” 

“But no wonder that AUD bulls continued to migrate to the NZD. Not such an enticing balance of payments story, but at least the RBNZ is likely to react to recovery and housing inflation with (much) earlier rate hikes. There's plenty more downside to AUD/NZD.”