Home News Aussie bets on RBA. Forecast as of 27.07.2022

Aussie bets on RBA. Forecast as of 27.07.2022

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The main interest rates in Australia and the US could finish 2022 at the same level, which suggests a faster rate of monetary restriction of the Reserve Bank compared to the Fed. How will this affect the AUDUSD? Let’s discuss the topic and make up a trading plan.

Weekly Australian dollar fundamental analysis

The report on Australia’s inflation for the second quarter has pressed the AUDUSD down. Although consumer prices have accelerated to a 21-year high of 6.1% and core inflation to 4.9%, the bottom line was worse than expected, reducing the 30% chance of a 75 basis-point cash rate hike at the Reserve Bank meeting on August 2. Currently, money markets estimate the probability of a rate increase of 50 basis points at 86%, and 25 basis points — at 14%. However, this does not mean that the Aussie has no chances to surge.

Dynamics of Australia’s inflation and the RBA rate

  

Source: Bloomberg.

Although softer-than-expected inflation data forced Deutsche Bank and Goldman Sachs to abandon their forecasts for a 75-basis-point cash rate hike in August, banks still expect the rate to rise to 3.1% and 3.35 % by the end of 2022, respectively. This is about the same as the 3.3% federal funds rate implied by CME derivatives. Now the rates are at around 1.35% for Australia and 1.75% for the US. Thus, the pace of monetary restriction of the Reserve Bank during the rest of the year is likely to be faster than that of the Fed, which increases the chance of AUDUSD correction.

Furthermore, the foreign environment for the Aussie has become more favourable. Despite the reduction of the IMF forecasts for the Chinese GDP, 4.4% to 3.3% in 2022, the Chinese economy is sending positive signals. For example, a number of Bloomberg leading indicators show that the economic recovery in China gained momentum in July due to improved consumer confidence and a rise in the PMI. Industrial profits rose in June for the first time since March as lockdowns were lifted in major cities, including Shanghai.

Change in IMF forecast for GDPs of largest world economies

 

Source: Bloomberg.

Goldman Sachs has cut its 3- and 6-month forecasts for the iron ore prices, a key component of Australian exports, from $90 to $70 and from $110 to $85 per ton due to the Chinese property crisis. However, Beijing has experience in resolving such situations. Furthermore, the government is willing to fulfill the plan for 5.5% economic growth in 2022 and should use a new stimulus.

A mild recession in the US and global economy will reduce the demand for the US dollar as a safe haven. Markets are rising on expectations, and the USD rally resulted from the fears of a soon downturn. If the greenback loses this benefit, and the Fed’s monetary tightening will slow down, the US stock market will turn bullish, supporting the global risks appetite and the Aussie.

Weekly AUDUSD trading plan

If the AUDUSD bulls will hold the price above the support at 0.69 and push it up to a July high of 0.6985, breaking it through, the rally could continue to 0.702 and 0.708.

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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