FX Viewpoint 22 Oct 2021 | AUD: Unsustainable gains | Article – HSBC VisionGo
- Recent AUD gains reflect the rebound in broad risk sentiment, strong exports, and a reopening boost
- Market hawkishness has likely been helpful for the AUD…
- …but a dovish RBA and the broader USD backdrop indicate that the AUD’s uptrend is likely to be unsustainable
In our economists’ view, the economic upswing in Q4 is likely to be more gradual than what we saw last year
The AUD has outperformed most of its G10 peers this quarter-to-date (Chart 1), with recent gains reflecting the rebound in broad risk sentiment, rallies in key commodity exports, and optimism over reopening as vaccination rates near 70%. The latter should support hopes the Australian economy will rebound in Q4 as restrictions are eased and borders reopen. That being said, any initial spending rush should be tempered somewhat as COVID-19 disaster payments are phased out. Our economists expect the economic upswing in Australia in Q4 (following the Delta outbreak) to be more gradual than last year (following the initial COVID-19 shock).
According to the RBA’s October statement, conditions for a rate rise “will not be met before 2024”
On the monetary policy front, the Reserve Bank of Australia (RBA) remains resolutely dovish. In its 5 October meeting, the RBA left its cash rate unchanged at 0.10% and maintained the 0.10% yield target on the April 2024 bond. The RBA also stated that it did not expect the conditions for lifting the cash rate to be met before 2024, given subdued wages growth and inflation pressures. In the next meeting on 2 November, our economists expect the RBA to remain dovish.
As market hawkishness met a dovish RBA, the 3-year Australian bond yield dropped immediately
However, rate markets appear to argue against the RBA’s dovishness. The sharp move higher in longer-term Australia-US rate differentials and 3-year Australian bond yield jumping above the RBA’s yield target (Chart 2) have likely been helpful for the AUD. On 22 October, the RBA announced an unscheduled operation to buy AUD1bn of the April 2024 bonds in the first such purchase since 26 February, and the 3-year bond yield dropped more than 5bp to 0.12% after the announcement (Chart 2).
Further AUD gains are likely to be elusive over the near term, in our view
In our view, much of the good may be priced in, limiting further AUD gains over the near term. We believe the broader USD backdrop and the RBA’s continued dovishness mean that the AUD’s uptrend is likely to be unsustainable over the longer term.