Expectations Of A Hawkish Shift By RBA To Keep The AUD supported
The Australian Dollar has underperformed in recent months.
But the lower it goes, the more likely the RBA will make a hawkish shift and speculation is rising that the bank is ready to slowly shift policy.
Next week’s meeting is likely to re-iterate a dovish stance, but it seems a matter of time before the bank tightens and many analysts expect rate hikes in early 2023.
Ozzie Recovers
The Australian Dollar was all set to be the worst performer of June before last week’s recovery and it has now managed to make small gains against equally weak currencies such as the Euro.
The ‘Ozzie’s’ underperformance in recent months has mostly been a consequence of the RBA’s yield curve control, which kept yields artificially low for the exact purpose of weakening the Australian Dollar. Job done, then, or at least the bank will be happy that the 2020 uptrend has been curbed and even reversed with AUDUSD –5% off the highs set in February 2021. A weaker currency will give the bank more wiggle room to slowly shift hawkish without sending it to the moon and crushing a fragile recovery. The question for many, is when exactly will the bank make this hawkish shift, and what will it entail? Speculation is already increasing that the July meeting could see a slight shift and this has helped lift the Australian Dollar of its lows, but it is probably too early to expect much. As ING note,
“RBA rate expectations have inevitably shifted to the hawkish side after the June FOMC meeting, and the market is now pricing in 45bp of tightening in two-year time, up from 25bp before the Fed’s hawkish shift. Still, rate expectations remain low when compared to Canada and New Zealand, where markets are pricing almost 100bp of tightening in the next two years. This means that there is still sizeable room for AUD to benefit from the RBA sounding hawkish at the 06 July meeting.”
Governor Lowe is making a speech on Tuesday which is one day before the blackout period during which no communication will be made by the bank. Lowe already talked last week and while he struck an optimistic tone on the economy and jobs, he re-iterated the bank’s dovish stance. This isn’t likely to change much on Tuesday or indeed, in next week’s meeting. Still, for the Australian Dollar it is more a question of when, not if, the bank eventually tightens. Westpac recently outlined their expectations for rate hikes and these are a lot more hawkish than the previous projections.
“We expect that the Bank will begin its tightening cycle in the first quarter of 2023 with a 0.15% lift in the cash rate.
That is expected to be followed by two more increases in 2023 of 0.25% each lifting the cash rate by year’s end to 0.75%... The peak in the cycle is estimated at 1.25% and is largely dictated by the sensitivity of Australia’s household sector due to its high debt levels.”
Expectations such as these will keep the Ozzie bid and while the July meeting may be a let-down, AUD isn’t likely to fall far before recovering again into future meetings.
But the lower it goes, the more likely the RBA will make a hawkish shift and speculation is rising that the bank is ready to slowly shift policy.
Next week’s meeting is likely to re-iterate a dovish stance, but it seems a matter of time before the bank tightens and many analysts expect rate hikes in early 2023.
Ozzie Recovers
The Australian Dollar was all set to be the worst performer of June before last week’s recovery and it has now managed to make small gains against equally weak currencies such as the Euro.
The ‘Ozzie’s’ underperformance in recent months has mostly been a consequence of the RBA’s yield curve control, which kept yields artificially low for the exact purpose of weakening the Australian Dollar. Job done, then, or at least the bank will be happy that the 2020 uptrend has been curbed and even reversed with AUDUSD –5% off the highs set in February 2021. A weaker currency will give the bank more wiggle room to slowly shift hawkish without sending it to the moon and crushing a fragile recovery. The question for many, is when exactly will the bank make this hawkish shift, and what will it entail? Speculation is already increasing that the July meeting could see a slight shift and this has helped lift the Australian Dollar of its lows, but it is probably too early to expect much. As ING note,
“RBA rate expectations have inevitably shifted to the hawkish side after the June FOMC meeting, and the market is now pricing in 45bp of tightening in two-year time, up from 25bp before the Fed’s hawkish shift. Still, rate expectations remain low when compared to Canada and New Zealand, where markets are pricing almost 100bp of tightening in the next two years. This means that there is still sizeable room for AUD to benefit from the RBA sounding hawkish at the 06 July meeting.”
Governor Lowe is making a speech on Tuesday which is one day before the blackout period during which no communication will be made by the bank. Lowe already talked last week and while he struck an optimistic tone on the economy and jobs, he re-iterated the bank’s dovish stance. This isn’t likely to change much on Tuesday or indeed, in next week’s meeting. Still, for the Australian Dollar it is more a question of when, not if, the bank eventually tightens. Westpac recently outlined their expectations for rate hikes and these are a lot more hawkish than the previous projections.
“We expect that the Bank will begin its tightening cycle in the first quarter of 2023 with a 0.15% lift in the cash rate.
That is expected to be followed by two more increases in 2023 of 0.25% each lifting the cash rate by year’s end to 0.75%... The peak in the cycle is estimated at 1.25% and is largely dictated by the sensitivity of Australia’s household sector due to its high debt levels.”
Expectations such as these will keep the Ozzie bid and while the July meeting may be a let-down, AUD isn’t likely to fall far before recovering again into future meetings.