Australian Dollar: Yield spreads signal downside against US Dollar – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad observes that AUD/USD is consolidating around 0.7050, with yield spreads pointing to downside risks below 0.7000. Haddad notes weak Australian business and consumer sentiment and argues that the Reserve Bank of Australia (RBA) is more likely to extend its policy pause, as growth is projected below potential and the current cash rate sits near estimated neutral levels.

Yield spreads and RBA pause risk

"AUD/USD is consolidating recent losses around 0.7050. Australia-US 2-year bond yield spreads suggests AUD/USD risk undershooting 0.7000 in the near-term."

"Australia’s business and consumer sentiment indexes paint a soft growth picture. NAB business confidence improved in May but remains deeply negative, while business conditions held at +3 index points, below its long-run average."

"In parallel, the Westpac–MI consumer sentiment index worsened to near record lows in June due to cost-of-living issues."

"First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate."

"RBA cash rate futures trimmed slightly odds of a 25bps hike by year end to 4.60%. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)