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Australian dollar prepares to move on RBA, swaying risk appetite


WEEKLY OUTLOOK FOR AUSTRALIAN DOLLAR: BARIS

  • Australian dollar rises amid recovery in market-wide risk appetite
  • Investors seem to be looking for a ‘soft landing’ on growth, inflation
  • RBA policy decision, US CPI report in focus in the week ahead

The Australian dollar recorded a lively recovery in the late half of May, wiping out more than half of the previous month’s decline. The boom came along with recovery in market-wide risk appetite, which provided undue support to the sentiment-oriented commodity block currencies.

Recession fears gripped markets for most of the second quarter. Economists have ticked off growth projections, stock markets have fallen and the US dollar has delighted in demand for liquidity. Bets of Fed rate hikes moderated against this backdrop, with the future-implied 2023 outlook losing a solid 62bps.

A reconsideration began in mid-May. Steady economic data flows – especially from the cyclically sensitive emerging markets – have apparently indicated that growth fears may be overstated. PMI activity surveys have agreed, reflecting a nearly year-long slowdown but putting current performance in line with the pre-pandemic trend.

Graph created with TradingView

Moderate perspectives on recession risk have not translated into a rebuilding of Fed rate hikes projections cut back amid the shake-up. Inflation expectations implied in bond markets remained anchored near three-month lows as investors’ mood improved,slipped sharply when sentiment soured.

Overall, the markets reckoned that the Fed’s fire-and-anger stance this year would succeed in halting runaway price growth and enabling a 2023 delay, while keeping the degree of economic slowdown bearable. In essence, traders embraced the proverbial “soft landing” scenario.

US CPI data likely to take the highest billing as this story unfoldsin the week ahead. The core inflation rate excluding volatile food and energy prices is expected to decline to 5.9 per cent year-on-year, the lowest since December. Meanwhile, a measure of consumer confidence is seen recovering from a 10-year low.

WILL THE RBA GO WELL WITH SWELLING RATE BUSINESS?

Local considerations will come into play along with the macro-level story, as the RBA provides a monetary policy update. Markets have priced at least a 25bps rate hike, and some observers are calling for a 40bps rise to bring the target cash rate to a more familiar 0.75 percent.

The RBA rate hike path priced in for the next 12 months has weakened significantly in recent weeks as medium-term domestic inflation expectations swung to the top of the 2022 range, even though PMI data indicated the weakest growth in four months.

How policymakers weigh these conflicting clues can be crucial. If the central bank indicates that its priority is proactive in hitting inflation back, thereby confirming the latest falconry shift in the baseline market view, it looks like the Aussie is likely to recover.

On the other hand, the RBA can telegraph a more sanguine mindset. This is because it reflects the Fed’s tough plans for this year – which have already increased global borrowing costs along with those in the US and are likely to continue to do so – along with cooling economic performance. AUD can slip in this case.

AUSTRALIAN DOLLAR TRADE RESOURCES

— Written by Ilya Spivak, Chief Strategist, APAC for techlives

To contact Ilya use the comments section below or @IlyaSpivak on Twitter

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