Snippet via ING on their Australian dollar outlook into and after the Reserve Bank of Australia monetary policy meeting on Tuesday, 5 July 2022 (statement due at 0430 GMT).
The background to ING's AUD view is the analysts are expecting a 50bp hike from the RBA tomorrow:
- inflation expectations data ... the 6.7% print in the latest release ... should have banished any thoughts of a lesser hike or even no hike at all.
- The other factor to consider is that with the latest inflation rate at 5.2%, and probably higher when we get the 2Q figure on 27 July, at 0.85% the RBA cash rate target is well off where it needs to be to even remove stimulus from the economy, and even further away from actually starting to restrict growth and bring inflation down. So it has to be at least 50bp.
For the AUD:
- Aussie dollar approaches the July RBA meeting with mostly headwinds, and a significantly weakened link between domestic monetary policy dynamics and AUD/USD suggests that a rebound towards the 0.7000 mark is unlikely to materialise soon even in the event of a hawkish surprise by the RBA (markets are not fully pricing in a 50bp hike).
- The size of RBA tightening likely has implications for FX only beyond the short-term, and in an environment where markets feel more comfortable with their pricing of a global slowdown and see the peak in rates, which could fuel a stabilisation in global risk sentiment and re-connection between short-term rate dynamics and FX. From this perspective, a more aggressive RBA tightening can suggest a wider room for AUD/USD recovery towards the end of this year and the start of next year (assuming that’s when market sentiment begins to recover), but a number of other factors – especially related to China’s demand and the USD outlook – will continue to be playing a big role too. All this makes any consideration about the AUD outlook purely based on rates dynamics still reductive.