AUD/USD to remain heavy in near-term but weakness already appears overdone – MUFG

Markets will watch the Reserve Bank of Australia’s (RBA’s) 6 July meeting, and Governor Lowe’s speech later on the same day. As economists at MUFG Bank notes, the RBA is expected to shift to more hawkish policy stance given strong economic rebound from COVID shock. But inflation remains frustratingly below target. Will RBA push back against market pricing for early rate hikes?

Will the RBA rub salt into the wounds?

“The deterioration in sentiment towards the AUD has been reinforced as well by building evidence of a loss of growth momentum in China and re-tightening of COVID-19 restrictions in Australia as the new Delta variant has resulted in new cases picking up to the highest level since last summer, although they remain relatively low. We do not expect the developments to materially dampen the RBA’s outlook for robust growth this year of 4.75% especially after stronger growth in Q1.” 

“The RBA has already signalled that it is unlikely to roll forward their three-year yield target from the April 2024 to the November 2024 bond at next week’s policy meeting. The RBA will also lay out their latest QE plans with the current AUD100 B tranche set to end in September. We expect QE purchases to be extended into next year initially at the current pace of AUD5 B/week but the pace will be made more flexible and conditional on evolving economic conditions. Finally, market participants will be watching to see if the RBA brings forward rate hikes plans from ‘2024 at the earliest’ similar to the Fed’s recent hawkish policy update.”

“With the Australian rate market already pricing in rate hikes as soon as next year, there is a greater risk that the RBA will disappoint more hawkish expectations next week and reinforce recent AUD weakness. However, the AUD is already well below levels implied by short-term yield spreads which should help dampen downside.”


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