AUD/USD started 2024 strong, above 0.68 after a nearly 4% rally in December.
However, the exchange rate soon ran into trouble and reversed this rally. I maintain the Q1 and Q4 forecasts for AUD/USD of 0.68 and 0.72 respectively.
While there is a further repricing of the Fed, which will weigh on the exchange rate,
investors will also push back expectations for RBA rate cuts, and I think we are
getting close to peak investor pessimism towards China’s economy.
Are we close to peak China pessimism?
Iron prices rallied strongly into year-end and took AUD/USD along with them.. Industry watchers put the rally down to restocking from low levels of
inventories ahead of the Australian cyclone season and potential supply
interruptions. There were also newswire reports of steel makers operating at losses
to boost employment and in anticipation of larger stimulus for the beleaguered
residential property sector.
The RBA vs the Fed
The RBA was a gentler rate hiker than the Fed. This, along with China’s weak
recovery has contributed to a downtrend in AUD/USD after the pandemic even as
global equity markets and commodity prices have rallied. I think the
game changer for AUD/USD during 2024 will be the relative Australian and US
monetary policy outlooks.
Looser fiscal and monetary policy Down Under
Australia is also undergoing a further loosening in fiscal policy in the coming six
months. The Stage 3 tax cuts have been a known quantity since the general
election in H122. Both major parties went to the polls with them as part of their
policy manifestos. The tax cuts were to unify the 32% and 37% income tax brackets
for annual incomes between AUD45-200k into a single 30% bracket starting 1 July.
The Stage 3 tax cuts were equivalent to about 50bp worth of RBA rate cuts,
according to some economists’ estimations. This assumes a significant proportion
of them were going to be saved by higher income groups.
These factors will have two implications for the relative monetary policy paths of
Australia and the US: (1) the Fed will be able to cut rates sooner than the RBA;
and (2) the Fed will cut rates more than the RBA. So, I expect a rise in the
Australian-US short-term rates spread in 2024 to give the AUD/USD a lift.
Follow for more updates on the FOREX and STOCK market:
However, the exchange rate soon ran into trouble and reversed this rally. I maintain the Q1 and Q4 forecasts for AUD/USD of 0.68 and 0.72 respectively.
While there is a further repricing of the Fed, which will weigh on the exchange rate,
investors will also push back expectations for RBA rate cuts, and I think we are
getting close to peak investor pessimism towards China’s economy.
Are we close to peak China pessimism?
Iron prices rallied strongly into year-end and took AUD/USD along with them.. Industry watchers put the rally down to restocking from low levels of
inventories ahead of the Australian cyclone season and potential supply
interruptions. There were also newswire reports of steel makers operating at losses
to boost employment and in anticipation of larger stimulus for the beleaguered
residential property sector.
The RBA vs the Fed
The RBA was a gentler rate hiker than the Fed. This, along with China’s weak
recovery has contributed to a downtrend in AUD/USD after the pandemic even as
global equity markets and commodity prices have rallied. I think the
game changer for AUD/USD during 2024 will be the relative Australian and US
monetary policy outlooks.
Looser fiscal and monetary policy Down Under
Australia is also undergoing a further loosening in fiscal policy in the coming six
months. The Stage 3 tax cuts have been a known quantity since the general
election in H122. Both major parties went to the polls with them as part of their
policy manifestos. The tax cuts were to unify the 32% and 37% income tax brackets
for annual incomes between AUD45-200k into a single 30% bracket starting 1 July.
The Stage 3 tax cuts were equivalent to about 50bp worth of RBA rate cuts,
according to some economists’ estimations. This assumes a significant proportion
of them were going to be saved by higher income groups.
These factors will have two implications for the relative monetary policy paths of
Australia and the US: (1) the Fed will be able to cut rates sooner than the RBA;
and (2) the Fed will cut rates more than the RBA. So, I expect a rise in the
Australian-US short-term rates spread in 2024 to give the AUD/USD a lift.
Follow for more updates on the FOREX and STOCK market:
Comment:
Moving stops to BE
