Published: July 17th, 2024
A new analysis from Dutch global investment giant Rabobank suggests that policy actions by the Reserve Bank of Australia (RBA) will likely extend the Australian Dollar's current show of strength.
The bank has brought its forecast targets for the Aussie forward on expectations that the RBA will raise interest rates twice this year, first in August and then later in November, as it fights to cool persistent inflation.
"Recent economic prints have firmed up our expectations for more rate hikes in this cycle," said Rabobank in a note to investors. The analysis notes that retail sales growth in May was 0.6 per cent month-over-month, pointing to strong consumer demand.
The yearly pace of CPI inflation, meanwhile, fell back to 3.5 per cent from the 4.2 per cent seen in the first quarter. This was ahead of consensus, which anticipated an easing to 3.6 per cent.
The trimmed mean, a closely watched measure of core inflation, rose one per cent in Q1, beating the consensus forecast of 0.8 per cent. The yearly pace fell back to 4 per cent, from 4.2 per cent.
A recent decision by Canberra to lower taxes for all 13.6 million Australian taxpayers from July 1st is not expected to reduce inflation, rather raising the potential for increased consumer demand. The RBA has said the economic impact of the tax cut brings an element of uncertainty.
Any additional RBA interest rate hikes this year would place it out of sync with other major central banks. Rabobank believes the interest rate differential would be supportive of AUD.
In early June, analysts were predicting that a nudge from the RBA would lift AUD to highs last seen a year earlier in June 2023. Analysts were betting that central bankers in Sydney would raise rates again to cool inflation, though a downward turn in global investor sentiment would eventually scuttle significant AUD gains.
Analysts believed inflation was rising based on an earlier print which came in above consensus at 3.6 per cent year-on-year. For AUD bulls, those figures offered support.
An analysis by Westpac said the central bank would play Hamlet in June. ‘To hike or not to hike? That is the question for RBA policymakers after a hotter-than-expected set of inflation figures arrived on Monday. AUD bulls are now straining to hear the answer.’
Westpac believed another rate rise will act as a trigger for forex traders closely observing AUD and NZD.
Australian CPI rose unexpectedly to 3.6 per cent in April (YoY), its highest level for six months. Economists were looking for a decline to 3.4 per cent.
An analyst note from Crédit Agricole’s FX strategy unit said digging into the CPI report’s details showed core inflation is the issue. With items with volatile pricing excluded, inflations looked stable at 3.5 per cent year on year.
The bank, however, was on the lookout for signs of upward pressure on monthly inflation figures in the pipeline, as prices for professional services were expected to swell in the coming months.
Minutes from the previous RBA meeting revealed that the bank’s policy committee believed a rate rise might be in the offing if inflation forecasts turn out to be overly optimistic.
'If the RBA delivers a rate rise at its mid-June meeting or signals strongly that a Q3 rise is possible, it might send AUD/USD back up to 0.69, its June 2023 high.’
Around this time in 2023, worries about China's property sector spilled over into currency markets, placing AUD on the back foot against G10 peers. Real estate stocks had weighed on Chinese economic underperformance for the previous eight months, leading to bouts of weakness for the export-sensitive Aussie.
A report by Bloomberg said that Chinese property stocks had fallen to their worst valuations in eight months as worry about a possible liquidation of the country’s giant Evergrande Group pointed to stress across the sector.
Evergrande, a China's largest property developer, saw its stock sink by 25 per cent after it called off meetings with major creditors at the last minute and announced its debt restructuring plan needed to be re-visited.
The biggest stock market casualty, however, was China Aoyuan Group, which sank by a record 75 per cent when markets resumed trading on Tuesday.
Growth in China’s property market is a core driver of demand for iron ore and other construction-related raw materials, essential exports for commodity-reliant Australia.
Analysts at Westpac’s forex strategy unit wrote that China’s tepid growth and investor worries over the property sector were putting pressure on AUD. 'We expect to see occasional rallies at times but the trend into October will likely remain on the down.’
Westpac said investor sentiment with regards to China would be the core driver of AUD valuations in Q2 2023, given a relatively quiet domestic news cycle Down Under.
Earlier in March 2023, AUD came under pressure when the RBA signaled that its cycle of interest rate rises might be drawing to a close. Data from China was also influential, spooking traders with news that Chinese imports had fallen year-on-year by more than 10 per cent.
Central bankers raised interest rates by the 25 basis points traders were anticipating, however the text of the announcement suggested the RBA was giving itself wiggle room to shutter its current hiking cycle.
In the aftermath of the announcement, AUD dropped to the bottom of the G10 performance list. An analyst note from RBC Capital Markets FX Strategy Unit said that the Aussie wasn't being helped by soft Chinese import figures and an apparent hotting up in diplomatic tensions between Washington and Beijing.
The RBA also cut a previous reference to ‘additional interest rate rises’ and replaced it with the phrase ‘further tightening’.
RBC analysts said the change provided more space for monetary policy maneuver, including restricting rises to just one more hike.
