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Aussie: the quieter you go, the further you reach. Forecast as of 03.06.2022

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China’s victory over COVID-19 allows drawing historical parallels with the second half of 2020. At that time, AUDUSD bulls were kings on Forex because of China and strong commodities and stock markets. Will they manage to repeat the success? Let’s discuss it and make a trading plan.

Weekly fundamental forecast for Australian dollar

Central banks start slowly and drive fast. When the Bank of Canada raised the overnight rate by 50 basis points at once in May, joining the Fed and other regulators, investors wondered why the Reserve Bank of Australia should not speed up a monetary restriction in June. Those rumors, China’s lockdown exit, and strong macro statistics on Australia catalyzed the AUDUSD’s rally to 1.5-month highs.

Twenty-two out of thirty-five experts from Reuters predict the RBA’s cash rate hike by 25 basis points at a meeting on 7 June, while eleven experts expect a 40 bp rate hike. ING cannot understand how one can move at a snail’s pace when the inflation of 5.1% exceeds an expected target of 2.3% and the labor market has been the strongest in the past decades. A 25 bp hike will not be enough to regain control over CPI. The RBA used to refer to low wage growth, but this argument is no longer relevant as local payrolls increased by 5.5% in January-March.

A publication of Australian GDP in Q1 made the acceleration of the RBA’s monetary restriction likelier and catalyzed the AUDUSD’s rally. The economy grew 0.8% q.q and 3.3% y-o-y. Its growth rates exceeded Bloomberg’s consensus forecast and pre-pandemic levels. 

Australian GDP dynamics

  

Source: Bloomberg.

Besides the strong inflation, employment, and GDP data, China’s lockdown exit and the stats on the commodities market also favor the AUDUSD’s new uptrend. Just recall the rally of the AUD in the second half of 2020 when China locked down while COVID-19 raged outside. Will the story repeat two years later?

I think the AUDUSD bulls are in less favorable conditions now. China did handle the Covid issue successfully, but the rest of the world has almost forgotten about the virus. What’s more, the US stock indexes were growing by leaps and bounds in the second half of 2020, but now investors do not buy stocks as the S&P 500 risks falling into a bear territory.

In such circumstances, which way the RBA will choose is an extremely important question. Will it tighten aggressively monetary policy as markets expect or opt for the experts’ opinion? The derivatives market expects the cash rate to grow to 2.7% by the end of 2022, while only 10 out of 35 economists surveyed by Reuters presume the rate will rise 2% and more. Forty percent of the respondents predict the rate won’t rise above 1.75%.

The RBA’s hawkish sentiment and 40 bp cash rate hike at a meeting on 7 June will catalyze the Australian bond yield’s and the AUD’s growth.

Australian bond yield dynamics

  

Source: Bloomberg.

Weekly trading plan for AUDUSD

First, the AUDUSD will have to deal with the US stats on the labor market in May. If the stats are strong, the pair’s pullback will allow opening longs to the levels of 0.735 and 0.745.

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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