AUD In Demand
The Australian Dollar has been well bid across the European today following the release of the bank’s latest meeting minutes overnight. In the release the bank noted that it expects domestic growth to return to pre-pandemic levels by the second half of next year. However, the RBA was slightly more downbeat about inflation. Given that wages growth in Australia was already subdued ahead of the pandemic, the bank projects that it will take longer than other economies for wage pressures to rise enough to rive inflation sustainably back to the bank’s 2%-3% target. With this in mind, the RBA still forecasts 2024 as being the likely lift off time for rates.
Economy to Rebound
On the recovery as a whole, the RBA remains optimistic. Household consumption and employment growth are forecast to stat picking up firmly as COVID restrictions are lifted. Additionally, the bank has noted that it is not concerned about overheating in the housing market and does not see this as a reason to raise rates ahead of schedule, which should allow for the broader recovery to remain on track. Instead, the bank deems macro-prudential measures as being the best way to deal with this situation.
The return of COVID restrictions in Australia has been a clear obstacle for the RBA and for the Australian economy. However, with nearly all restrictions lifted now, the bank s hopeful that the economy can recover at a fast pace. With this in mind, the market will be focus on RBA tapering probabilities as we head through the remainder of the year.
Upside Inflation Risks
Despite the RBA’s views on inflation, there are also still upside risks to be wary of. The energy crisis and supply chain issues affecting the global economy have yet to be resolved. With these factors still very volatile, there are risks that any intensification of the situation might see the RBA shifting its inflation projections forward, leading to a repricing in the AUD rates markets.
The Aussie is at a key technical area here. Following the breakout above the bearish trend line, the market is now testing the .7483 swing highs. If the current pattern is to be a basing patter, suggesting further upside, bulls will need to see a clean break higher here. Should we see a reversal from current highs, that suggests the risks ofa reversal lower and continuation of the bear trend.