AUD Outlook: RBA Holds Firm on Rates Amid Economic Uncertainties

The Australian dollar (AUD) saw moderate gains, with the AUD/USD rate climbing above 0.6600 in recent overnight trading. This movement reflects cautious optimism as markets await the U.S. election outcome and closely monitor signals from the Reserve Bank of Australia (RBA) regarding future interest rate adjustments.

RBA’s Current Stance: Rates Remain Steady

In its latest policy announcement, the RBA opted to maintain its cash rate at 4.35%, marking the eighth straight meeting without a rate adjustment. The central bank emphasized its “sufficiently restrictive” stance, designed to curb inflation until it reliably aligns with the target range. The RBA projects that inflation will not sustainably reach target levels before 2026, justifying a measured, “wait-and-see” approach to avoid reigniting inflationary pressures.

Inflation Forecast and Economic Headwinds

The RBA’s inflation forecast points to a gradual reduction in core inflation to around 2.5% by late 2026, with a temporary dip in headline inflation to target by mid-2025 before rising slightly. Several factors, however, could challenge these projections, including:

• Household Consumption: Expected to strengthen as income growth picks up in the latter part of the year.
• Lagged Effects of Policy: There remains uncertainty over how the delayed impact of previous rate hikes will affect consumer spending, wage growth, and pricing strategies.
• Global Economic Risks: External influences, such as China’s economic performance and global trade conditions, may further impact Australia’s economic trajectory.

Given these dynamics, market analysts largely anticipate that the RBA will hold off on rate cuts until at least February 2024, in line with recent comments from RBA Governor Michele Bullock. She noted that the current policy settings appear appropriate, with no immediate plans to adjust rates in either direction.

AUD’s Performance Supported by RBA’s Caution

The RBA’s steady approach has provided a measure of support for the AUD, which has outperformed other G10 commodity-linked currencies this year. While the RBA is expected to gradually lower rates in 2024, its approach remains notably more conservative than the Reserve Bank of New Zealand (RBNZ). The RBNZ recently cut its policy rate by 50 basis points and is expected to make additional cuts soon, underscoring a more aggressive stance.

This policy divergence could see AUD/NZD rise above 1.1000 in the coming months. However, the outcome of the U.S. election could significantly influence this trend. A Trump victory might weigh on both the AUD and NZD due to possible adverse effects on China’s economy and global trade, potentially pushing AUD/USD down to 0.6300. Conversely, a Harris administration win could trigger relief rallies, potentially lifting AUD/USD toward 0.6900.

Overall, while the RBA’s cautious approach has underpinned the AUD’s relative resilience, external factors such as the global economic outlook and political shifts remain crucial in shaping its future trajectory.

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