AUD faces headwinds above 0.72 as RBA signals pause, TD warns
The Australian dollar (AUD) is likely to face significant resistance above 0.72 against the US dollar, primarily due to a dovish shift in the Reserve Bank of Australia's (RBA) messaging and external economic pressures. Per the full note from TD Securities, the RBA's recent 25 basis point hike to 4.35% was accompanied by a cautious outlook, suggesting a pause in future rate increases unless inflation data exceeds expectations. This dovish pivot, combined with geopolitical risks from the Middle East, casts doubt on the AUD's ability to sustain gains above 0.72, especially given the strong performance of the US dollar supported by hawkish Federal Open Market Committee (FOMC) signals.
What the desk is arguing
The desk posits that the AUD's upward momentum is constrained by recent RBA communications and external economic shocks. TD Securities has revised its expectations for the RBA, now forecasting a final 25 basis point hike in August, contingent on stronger-than-expected inflation data for Q2. This cautious approach signals a potential ceiling for the AUD, particularly as the RBA balances inflation and growth risks.
Supporting this view, the RBA's recent messaging indicates a willingness to pause further rate hikes, framing the Middle East conflict as an income shock that could impact domestic economic conditions. The AUD/USD pair's ability to reclaim levels above 0.72 is seen as contingent on broader US dollar weakness, which TD Securities considers unlikely in the near term due to persistent hawkishness from the FOMC and resilient US economic indicators.
Where it sits in our coverage
Our consensus target for AUD/USD is 0.75, with a range between 0.72 and 0.78. Notable firm targets include: - jpmorgan: 0.76 - bofa: 0.74 - citi: 0.75
This perspective aligns with TD Securities, which anticipates challenges for the AUD in the near term, particularly as their revised rate call suggests a more cautious RBA stance than previously expected. The desk's view sits at the lower end of the consensus range, reflecting the potential for further downside in the AUD.
How other firms see it
Several firms, including jpmorgan and citi, share a similar outlook regarding the AUD's near-term challenges, emphasizing the impact of RBA policy on the currency's trajectory. Conversely, bofa presents a more optimistic view, suggesting that the AUD could outperform if global economic conditions stabilize.
Key related factors to monitor include the AUD/NZD cross, which may reflect shifts in regional economic sentiment, and the broader implications of US economic data releases on AUD/USD dynamics.
What the calendar says
With the RBA's next meeting scheduled for August 10-11, traders should keep an eye on upcoming inflation data releases, as these will be critical in determining the likelihood of further rate hikes and, consequently, the AUD's performance against the USD.
TD Securities has shifted its RBA call to a final 25bps hike in August to 4.60%, citing dovish May messaging and Middle East income shock risks, while warning AUD faces near-term headwinds above 0.72. Summary: The RBA hiked the cash rate 25 basis points to 4.35% in an 8-1 vote at its May meeting, with messaging characterised as dovish and pointing to a temporary pause, according to TD Securities The RBA views risks to both inflation and growth as now more evenly balanced, framing the Middle East conflict as delivering an expected income shock, per the TD Securities note TD Securities revised its RBA call to a final 25 basis point hike in August, taking the cash rate to 4.60%, conditional on Q2 trimmed mean CPI exceeding the RBA's own forecast, according to the bank Front-end Australian bonds are seen as fairly priced but the long end remains subject to offshore moves, with the short five-year ACGB position in TD Securities' model portfolio flagged as at risk AU-US yield spreads are expected to compress if the growth outlook weakens, per TD Securities AUD/USD recapturing levels above 0.72 is seen as requiring broader US dollar weakness, which TD Securities views as unlikely near-term given hawkish FOMC dissents and resilient US economic data TD Securities has revised its Reserve Bank of Australia rate call, now expecting one final 25 basis point hike in August that would take the cash rate to 4.60%, after the central bank's May decision delivered a more cautious tone than the bank had previously anticipated. The RBA raised rates by 25 basis points to 4.35% at its May meeting in an 8-1 vote, a result that was broadly in line with market expectations.
However, analysts at TD Securities characterised the accompanying messaging as dovish, with the board signalling a willingness to pause and assess conditions before moving again. The RBA framed the Middle East conflict as an income shock, and noted that risks to both inflation and growth were now more evenly balanced, a shift from the more hawkish posture that had prevailed in recent months. TD Securities said it would maintain its call for a further hike only if second-quarter trimmed mean inflation came in above the RBA's own forecast for that period.
Should that condition be met, the bank expects the board to act in August, bringing the terminal rate to 4.60%. For the Australian dollar, the implications of the RBA's shift are seen as broadly negative in the near term. TD Securities argued that a sustained move back above 0.72 against the US dollar would depend on a broader weakening of the greenback, a scenario the bank viewed as difficult to achieve given persistent hawkish signals from within the Federal Open Market Committee and continued resilience in US economic data.
Until those conditions change, the Australian dollar is likely to face a ceiling. On rates, TD Securities flagged that the RBA's more balanced messaging introduced meaningful risk to its short five-year Australian government bond position, held within the bank's model portfolio. Front-end bonds were described as fairly priced, while the long end was characterised as vulnerable to moves driven by offshore markets rather than domestic factors.
The bank also anticipated compression in AU-US yield spreads should the Australian growth outlook continue to deteriorate in the months ahead. --- August meeting is on the 10th and 11th: --- The dovish pivot in RBA messaging, combined with the income shock narrative from the Middle East, reduces the probability of a June move and could weigh on AUD in the near term, particularly given TD Securities' view that recapturing levels above 0.72 against the USD will require broader dollar weakness that may not materialise. Hawkish dissents within the FOMC and resilient US data are seen keeping the greenback supported, limiting the upside for the Australian dollar even if domestic data cooperates. On rates, TD Securities flagged clear risk to its short five-year Australian government bond position given the RBA's more balanced messaging, while AU-US spread compression is anticipated if the growth outlook continues to soften.
This article was written by Eamonn Sheridan at investinglive.com.
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