On Tuesday, the Reserve Bank of Australia (RBA) raised interest rates by 50 basis points to 2.35%. Analysts at Wells Fargo see the RBA making further rate hikes in the near term but at a slower pace, which should weigh on the Australian dollar. They point out that risks in the AUD/USD exchange rate are titled to the downside.
“Solid growth but uncertainty regarding consumer and household trends amid high inflation reinforces our view for continued rate hikes from the RBA, albeit at a slower pace than the recent 50 bps per meeting trend.”
“Our outlook for smaller magnitude rate hikes moving forward has implications for the Australian dollar's path as well. We expect the Australian dollar to soften through the end of 2022, before a rebound as 2023 progresses. With our expectation for the RBA to hike rates at a 25 bps pace beginning in October, and as the Federal Reserve maintains its hawkish approach, RBA rate hikes should lag the Fed's and also fall short of monetary tightening currently priced by financial markets. This should contribute to Australian dollar softness versus the greenback through the end of this year and perhaps into early 2023.”
“The risks could be tilted toward less weakness in the Australian dollar than currently anticipated, as inflation pressures could lead the RBA to deliver larger rate hikes despite uncertainty surrounding the consumer sector. We see prospects for Australian dollar strength to improve as 2023 progresses, given we expect the United States to fall into recession and the Fed to cut rates.”