RBA still applying – Rabobank

AUD is not the only G10 currency that has been on a wild ride over the past few weeks, JPY clearly takes that crown. That said, between mid-July and early this week, AUD/USD retraced all of its gains since late April before showing signs of recovery, notes Jane Foley, senior FX strategist at Rabobank.

The RBA remains wary of higher inflation

“The reasons for the changes relate to both a shift in expectations around RBA policy and the AUD’s traditional role as the ‘higher risk’ currency within the G10, which has left it out of favor in recent market routs. However, the ‘higher risk’ status is no longer as justified as it once was, given Australia’s fundamentally sound context. We maintain our 6-month forecast of 0.70 AUD/USD.”

“The recent release of Australia’s Q2 CPI inflation on 31 July removed any remaining expectations that the RBA would raise rates at its policy meeting on 6 August. While the AUD softened on the data, the market had already started to price in a softer RBA policy path ahead of the inflation release. This has been reflected in AUD/USD’s lower level since mid-July.”

“This morning RBA Governor Bullock said that ‘The Governing Council remains vigilant about rising inflation risks and will not hesitate to raise rates if necessary.’ We have not changed our AUD forecasts this week and continue to look for a move to 0.68 on a 3-month view. In the short term, we favor buying AUD over EUR and look for a move back below EUR/AUD1.66.”