Analysts at Wells Fargo brought forward expectations for monetary tightening from the Reserve Bank of Australia; however, they still expect the Aussie to soften versus the US dollar over the medium term. They forecast AUD/USD at 0.6700 by the third quarter of 2023. 

Key Quotes: 

“In an environment of positive economic momentum and above-target underlying inflation, the Reserve Bank of Australia (RBA) has turned more hawkish. In its April statement and minutes, the RBA said that faster inflation and a pickup in wage growth have moved up the likely timing of an initial rate hike. More specifically and arguably more notable, policymakers opted to drop the “patient” language from its official statement, further cementing the hawkish shift in tone.”

“We have brought forward our expectations for RBA policy rate increases, and now expect an initial 15 bps rate hike in June, followed by 25 bps hikes at each meeting in July, August, November, and December, which would bring the policy rate to 1.25% at the end of 2022. In 2023, we expect the tightening cycle to continue with 25 bps hikes in Q1, Q2, Q3, and Q4, taking the RBA policy rate to 2.25% by the end of next year.”

“Even though we have brought forward our expectations for monetary tightening, we still believe RBA rate hikes should lag behind those of the Federal Reserve. We also believe RBA rate hikes are likely to fall short of the tightening currently priced by market participants. As a result, we expect the Australian dollar to soften against the U.S. dollar over the medium term with some potential stabilization later on.”

“We forecast the AUD/USD exchange rate to reach 0.6700 by Q3-2023. However, we believe the risks are tilted to the upside. Should inflation prove to be more persistent, the currency could experience a more gradual pace of depreciation than our base case forecast suggests.”
 

This article was originally published by Fxstreet.com.Read the original article here.

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