Extracted via ING on their outlook for the Australian dollar before and after the Reserve Bank of Australia’s monetary policy meeting on Tuesday 5 July 2022 (report expected at 04:30 GMT).
The background to ING’s view on the AUD is that analysts expect the RBA to rise by 50 basis points tomorrow:
- the data on inflation expectations…the print of 6.7% in the latest version…should have banished any idea of a lesser rise or even no rise at all.
The other factor to consider is that with the latest inflation rate at 5.2%, and likely higher when we get the Q2 figure on July 27, at 0.85%, the rate target for RBA cash is a long way off where it needs to be to even suppress the stimulus in the economy, let alone start to actually start restraining growth and lowering inflation. It must therefore be at least 50 basis points.
- The Australian Dollar enters July’s RBA meeting with mostly headwinds, and a significantly weakened link between domestic monetary policy momentum and AUD/USD suggests a rebound towards the 0.7000 mark may not be forthcoming. unlikely to materialize soon, even in the event of a hawkish surprise from the RBA (markets are not fully pricing in a 50bp hike).
The extent of the RBA’s tightening is likely to only have currency implications beyond the near term, and in an environment where markets feel more comfortable with their pricing of a global slowdown and see the peak in rates, which could fuel a stabilization of global risk sentiment and a reconnection between the dynamics of short-term rates and the exchange rate. From this perspective, a more aggressive RBA tightening may suggest a wider margin for AUD/USD recovery towards the end of this year and early next year (assuming it is at market sentiment is beginning to recover), but a number of other factors – particularly related to Chinese demand and the outlook for the US dollar – will also continue to play an important role. All of this makes any consideration of the AUD’s outlook purely based on rate dynamics still reductive.