Further RBA hikes are not essential to Standard Chartered’s bullish Australian Dollar view, with AUD/USD retaining support from higher domestic rates.
The Australian Dollar does not need another domestic interest-rate rise to recover against the US Dollar, according to Standard Chartered’s outlook.
The bank expects Australia’s existing yield advantage to support AUD/USD once investors become convinced that US rates are approaching their peak.
“We expect the AUD to strengthen once the Fed signals that US rates are near their peak, which should allow resilient Australian fundamentals to reassert themselves.”
AUD/USD traded near US$0.6978 on Tuesday, up 0.16% after gains of 0.14% on Monday and 0.40% on Friday.
That recovery has so far reversed only a small part of September’s 3.15% decline.
Standard Chartered’s positive view covers the next six to twelve months, with the timing of a turn in the US Dollar central to its argument.
“We also expect the US Dollar to peak in the next few weeks along with short-to-medium-term US bond yields.”
Australia can retain a rate advantage without further tightening
Standard Chartered expects the Reserve Bank of Australia to wait, despite inflation remaining a concern.
“We expect the RBA to leave rates unchanged, but retain the option to hike again should inflation intensify.”
That differs from Westpac’s forecast for another November increase, but need not prevent Australian rates from supporting the currency.
Standard Chartered explains:
“At 4.60%, Australia’s cash rate is currently 60-85bp above the Fed’s 3.75-4.00% range. Thus, even with our two additional 25bps Fed hikes expectation, Australian rates would hold a modest positive rate differential.”
In other words, the Australian cash rate would remain above the US range even if the Fed tightened twice and the RBA stood still.
Weak US hiring supports the pause argument
Friday’s US employment figures showed payrolls rising by just 29,000 in September, while annual wage growth slowed to 3.0%.
Those figures strengthen the argument against an immediate Fed increase, although they do not establish that the tightening cycle is over.
Standard Chartered had already placed greater weight on the coming inflation readings:
“We see little chance of an October Fed rate hike and expect inflation data for Sep-Nov determining whether the Fed moves in December.”
A lasting AUD/USD recovery would still be vulnerable if US yields remained elevated or demand for riskier currencies weakened.
“Key risks are persistently high US yields, weaker China growth or a sharper deterioration in global risk sentiment.”
Our currency coverage draws on live market data, official economic releases and published bank research.
