We are revising our bullish AUDUSD target from 0.7350 to 0.7550, we would look to buy dips below 0.7300 and see the pair in a range between 0.7200 and 0.7600. Second-tier data indicators show mounting inflationary pressures, pointing to further risks of an earlier-than-expected hawkish turn in the RBA’s policy rhetoric. Meanwhile, markets will likely continue to view the AUD as a clear expression of commodity price strength.
Since our last AUD update on March 2 (link), the balance of the drivers of AUD’s price action has moved very quickly towards the glass half full. Fears of systemic events in the market related to sanctions on Russia have not materialized, sentiment around Chinese assets has improved sharply following statements of support from local authorities on March 16 and February data on the came as a stronger than expected surprise on March 17. These factors likely all played a significant role in pushing the AUDUSD through our target of 0.7350 and to its highest level since November 2021, but appear to be overshadowed by the broader market trend of viewing the AUD as a proxy for commodity prices. The IMM data actually shows that a large portion of the very persistent (and oft-discussed) short positions in the AUD were liquidated in the week to March 15 (see Figure 10), ahead of many of the events we list below. -above.
Domestically, another element that has helped the AUD is that the market continues to see hawkish shifts in US monetary policy as a reason to anticipate similar developments from the RBA, despite the continued decline in this last. Since March 2, expectations for Fed policy tightening implied by the OIS in 2022 have risen from 132 basis points to over 200 basis points, and from 120 basis points to 180 basis points for the RBA. As in the US, the recent rise in Australian nominal yields appears to be driven by real yields, which have accelerated above 0% and brought the differential to the USD equivalent back to levels last seen. in November 2021 (see Figure 11).
For now, we believe that the positive momentum from international and domestic factors should persist. All else equal, this suggests that the AUD heading back towards 200dma around 0.7300 will find buyers, with the October 2021 highs around 0.7550 as a near-term target, and potential for spikes too. higher than near the June 2021 highs around 0.7600. On the international front, the AUD’s real terms of trade have largely negated most of the strength seen at the start of the war in Ukraine in late February and early March, but this is unlikely to be seen as a lasting challenge to AUD strength as Europe’s frantic quest to secure new energy sources is likely to channel expectations for further capacity expansion and investment in growing Australian industry LNG. The same is true for food exports, with current concerns over plantings in Ukraine likely suggesting that Australia’s role as a net agricultural exporter will remain a net source of support for the currency.
On the home front, RBA policy remains the focus. As shown in Figure 12, markets expect the RBA to lag the Fed in raising rates in 2022, with the first full rate hike scheduled for the June 7 meeting. Markets also expect the RBA tightening cycle to end with a higher terminal rate, with limited prices for rate cuts beyond the peak of the cycle. This is consistent with more muted inflation expectations, as AUD 5-year inflation breakevens have not tracked their USD equivalents higher in recent weeks. Possible explanations include expectations that the RBA will be more successful than the Fed in lowering inflation over the medium term, but also considerations of exchange rate strength cushioning the blow from rising commodity prices in domestic terms, the continued lower local CPI level (3.5% YoY in Q4) compared to nearly 8% last seen in the US, and perhaps the lower frequency of Australian data on inflation and wages (the release of data on CPI and first quarter wage growth is due on April 26 and May 17 respectively).
Nevertheless, recent data suggests that the risk remains in the direction of further hawkish developments. Westpac’s consumer confidence indicator fell in March to its lowest level since September 2020, with inflation concerns playing a key role in the decline. While it is certainly notable that Governor Lowe did not discuss this specific data point in his comments on Monday, we believe it deserves attention, especially with most markets seeing the federal election (date yet to be determined, but likely May 21) as a major headwind against RBA rate hikes ahead of the June 7 rate decision, in 3 meetings from now. While we fully acknowledge and understand the reasons behind these expectations, we also see a risk that the RBA may see further data printouts in line with the narrative that emerged from the March consumer confidence indicator as a factor. qualification for the “widespread change in inflation”. psychology” that Governor Lowe spoke about earlier this week.
The Melbourne Institute’s inflation gauge for February on April 3 and the March jobs report on April 14 will focus on this front. And while a sudden and complete RBA U-turn on political patience and a pre-election hike still remain a distant risk at this stage (particularly at the next rate decision on April 5), the possibility of markets moving towards other prices in the US 5-year break-even inflation rate (%) Australian 5-year break-even inflation rate (%) The possibility of a 50 basis point hike at the June 7 meeting, versus 35 basis points currently, seems like a relatively small handy fruit.
That said, our short-term target revision for AUDUSD from 0.7350 to 0.7550 is quite muted. Why ? The main reason is that while many factors have indeed become more constructive for the AUD, or have the potential to do so, the hurdle of a large short position, which we have repeatedly highlighted as a bullish factor for the AUD since the start of the first quarter, seems much less pressing. now than at any time since mid-2021. The CAD, where the IMM net positioning data has been long since January, offers an important caveat on this front, as the USDCAD is still trading above 1.2500 even with much monetary policy. more hawkish and an equally favorable terms-of-trade environment.
In short, until the Fed gains enough ground with its rate hikes to depress commodity prices, the AUD is biased higher.