According to HSBC, the Reserve Bank of Australia's (RBA) more hawkish stance compared to the Federal Reserve could cause front-end yield spreads to move further in favor of the AUD. However, the recovery in China and the outlook for Australia's key exports are still crucial factors that are currently missing.

Key Points:

1. RBA's Hawkish Stance and Favorable Domestic Factors: HSBC identifies three favorable factors that may support the AUD. Firstly, recent labor market and overseas arrivals data indicate a strong inward migration trend, and housing prices have gained momentum. Secondly, with the estimated time for inflation to return to the target band being as late as mid-2025, the RBA may have little tolerance for upside surprises, making market reactions asymmetrically large on hawkish data beats. Thirdly, concerns over slowing consumer consumption may not cap front-end yields, as higher peak rate pricing has not been followed by deeper rate cut pricing.

2. China's Recovery and Export Outlook are Crucial: Despite the favorable domestic factors, a broader recovery in China and a brighter outlook for Australia's key exports are not yet evident. HSBC suggests that the market is likely to require a comprehensive stimulus package to become more constructive on the AUD-USD, and the focus is expected to shift from trading on "hope" to trading on "results".

3. Softer Risk Appetite and Uncertain Direction: An additional concern is that the risk appetite may soften given the stretched sentiment and positioning indicators. HSBC suggests that AUD-USD may not show a decisive direction until the push-and-pull dynamic between domestic factors and China-related concerns changes.

Summary: HSBC's analysis indicates that while the RBA's hawkish stance and favorable domestic factors could support the AUD, the currency's performance against the USD remains contingent upon China's recovery and the outlook for Australia's exports. The bank implies that markets are likely to be more demanding of concrete results rather than mere hopes for stimulus packages. Furthermore, a softer risk appetite due to stretched sentiment and positioning indicators may also play a role in the AUD-USD dynamics.


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AUD/USD daily candles:

audusd fundamental china rba Federal Reserve 30 June 2023

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