We have the RBA on 05/07 but we don’t expect a rate hike to boost the AUD. The big trend in the AUD is down as we have noted in previous posts and we see more AUD weakness ahead. The logic of our view and the levels of support and resistance to look out for are below:
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The market expects a 50 bps rate hike and if this occurs we expect no big upside reaction in the AUD:
“We expect the Board will decide to lift the cash rate by 50 bps from 0.85% to 1.35%. We will be particularly interested in any guidance the Governor may provide about the August meeting, where we expect a third consecutive 50 bps move prior to a pause in September. The June quarter inflation data, to be published on Wednesday, July 27, will be a key update a little less than a week prior to the August Board meeting.” ” (WESTPAC)
No 75 BPS Hike Coming 50 BPS Expected
Governor Lowe recently noted: “We’re going to look at the data we have each month and the level of interest rates and the inflation. But I expect that next month we’ll be having the same discussion at our board meeting: 25 or 50.”
If we look at the latest data and an inflation rate of 5.2%, which will probably move higher when we get the second-quarter figure later in the month on 27 July.
“Given the strong data prints and upside inflation risks, we expect the RBA to take decisive action and hike by 50 bps. However, we see a low likelihood of the RBA sounding more hawkish in the statement after the Governor’s successful attempt in paring back aggressive OIS pricing.” (TDS)
There is an argument for a bigger hike, but governor Lowe’s view earlier points to the fact that the decision has already been made not to hike by a 75 bps hike and the main reason for this could be how frequently the RBA meets to talk about monetary policy.
The RBA meets to evaluate monetary policy monthly, whereas the Fed do it on a longer time cycle meeting every six to eight weeks which means the RBA can act in a slower more measured way.
Assuming the wage-price data is strong enough later this month we will probably see the RBA do a further 50bp hike in September, which would see rates move up to 2.35% by the end of the third quarter.
If rates move up to the above level rates will rise to a neutral level in terms of inflation so this would probably be a peak and then the RBA should be able to do slower increases.
Interest Rate Differentials Favor the USD
If we take the market’s view there will be another 75bp by year-end taking rates up to 3.1%. Over in the US, the Fed funds rate should move up 3.75% by the year-end according to the market but may end up higher.
Why the USD is Long Term Bullish on the AUD
The USD has interest rate differentials on its side and we also have collapsing commodity prices which should keep the pressure on the AUD.
Below is the monthly chart of copper which is nicknamed “Dr. Copper” due to its wide use in the global economy and its ability to predict where the economy is going. The collapse points to a big global slow-up in economic activity which we have noted before and we think the global economy could face a recession.
We also think stocks have further to fall as recession fears grow and the AUD is heavily correlated with SP500 strength or weakness.
In terms of a hike, 25 bps would in our view see a sell-off, a 50 bps hike would see no big reaction and even a 75bps hike would only lead to a minor rally.
Technical Analysis
The key levels of support and resistance to watch are on the chart below – we expect rallies to fail and a break of support will set up a move down to monthly support at 0.6500.
