The Reserve Bank of Australia (RBA) has turned more hawkish but with risks to the domestic outlook and slowing global growth, the RBA’s tightening path may still disappoint markets. The lack of positive catalysts offsets a potential downturn in risk appetite, which may lead to near-term AUD weakness, economists at HSBC report.

Potential downside ahead

“We think that the RBA is likely to be in ‘inflation fighting’ mode at least for the next few meetings, and expect 25bp hikes in June, July, and August, another in November, taking the cash rate to 1.35%.”

“Australia’s real wages are falling, which will weigh on consumer spending; the housing market is likely to cool more than previously thought and this, too, will weigh on economic growth. Considering also a backdrop of slowing global growth, we think it may be hard for the RBA to keep pace with the Fed. As such, we see AUD/USD declining in the months ahead.”

“Over the near-term, rebounds in risk appetite are likely to remain fragile amid persistently elevated geopolitical uncertainty and China’s COVID-19 situation. A hawkish outcome (i.e., a larger rate hike) at the RBA’s 7 June meeting also seems unlikely. Consequently, AUD/USD is vulnerable to a reversal lower.”

This article was originally published by the original article here.


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