In recent months, the Australian dollar has shown weak dynamics.
But the lower it gets, the more likely the RBA will make a hawkish shift, and rumors grow that the bank is ready to slowly change policy.
Next week’s meeting is likely to reiterate the dovish stance, but it looks like it’s a matter of time before the bank tightens up and many analysts expect a rate hike in early 2023.
With a calm beginning of the week, the S & P500 and DJI indices did not completely change, the EURUSD pair also did not change. The only noticeable movement is the fall in the FTSE by -0.45%. This is the last week of June and the first half of the year when markets tend to enter the summer calm with less volume and less volatility. The ranges already set for most US dollar pairs are likely to persist, and established uptrends in equity markets are also likely to persist. AUDUSD was one of the few currency pairs that looked like it was going to break out of its range when it fell to lows of 0.754 earlier in June, but it has since recovered and may rise higher in the coming months.
Ozzy is recovering
The Aussie was all set for its worst June performance ahead of last week’s rebound and has now managed to rally slightly against equally weak currencies such as the euro. It is important to note that AUDUSD will close a month ago above the range lows set in early April and look much better from a technical point of view as it also rallied back to 200dma.
The Ozzy’s lag in recent months has been largely due to control over the RBA’s yield curve, which has kept yields artificially low precisely in order to weaken the Australian dollar. So the job is done, or at least the bank will be happy that the 2020 uptrend has been curbed and even reversed to AUDUSD -5% from the highs set in February 2021. A weaker currency will give the bank more wiggle room to slowly switch to a hawkish course. without sending him to the moon and crushing fragile recovery. For many, the question is when exactly will the bank make this hawkish transition and what will it entail? There are already speculations that there may be a small shift at the July meeting, which helped lift the Aussie from its lows, but it is probably too early to expect much. As ING notes,
“Expectations for the RBA rate have inevitably shifted towards hawkish changes after the June FOMC meeting, and now the market estimates the rate tightening by 45 bp. two years later compared to 25 bp. before the Fed’s hawk shift. However, rate expectations remain low compared to Canada and New Zealand, where markets are expecting a nearly 100bp tightening. in the next two years. This means there is still room for the Australian dollar to benefit from the hawkish sound of the RBA at the July 6 meeting. ”
Gov. Lowe will speak on Tuesday, the day before the power outage period, during which the bank will not be in contact. Lowe spoke last week, and while he sounded optimistic about the economy and jobs, he echoed the bank’s dovish stance. It is unlikely that this will change much on Tuesday or even at next week’s meeting. However, for the Australian dollar, it is more of a question of when, rather than if the bank will eventually tighten. Westpac recently outlined its rate hike expectations, and they are much more aggressive than previous forecasts.
“We expect the Bank to start a tightening cycle in the first quarter of 2023 with a 0.15% increase in the cash rate.
This is expected to be followed by two more increases in 2023 of 0.25%, each of which will raise the money rate to 0.75% by the end of the year … The peak of the cycle is estimated at 1.25% and is largely dictated by the sensitivity of the sector households in Australia. due to the high level of debt. “
Expectations like this will keep Ozzy’s proposal alive, and while the July meeting may be unsuccessful, the Aussie is unlikely to fall much before bouncing back for future meetings.