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The Australian Dollar can look forward to further support as more interest rate hikes are likely, according to new research from a major global bank.
Asi-focussed Standard Chartered says it now sees two more hikes from the Reserve Bank of Australia (RBA) in light of recent guidance from the central bank, whereas before analysts were of the belief the hiking cycle was complete.
"The RBA is now more concerned about inflation again, after dovishness in March and April," says Edward Lee, Regional Head of Research, ASEAN and South Asia at Standard Chartered, based in Singapore.
The Australian Dollar rose sharply against the Pound, Euro, Dollar and most other peers after the RBA surprised by raising interest rates by 25 basis points on June 06 and appeared committed to further hikes, if the data warrant.
The message was reinforced by RBA Governor Philip Lowe a day later in a speech delivered in Sydney, where he said the recent decision to raise the minimum wage was one area of inflationary pressures in the economy.
"The Reserve Bank of Australia (RBA) has now turned decidedly hawkish again, after being clearly dovish as recently as March and April, which caused us to tone down our rate-hike calls," says Lee.
Foreign exchange markets are highly sensitive to interest rate developments and the RBA's 'hawkish' shift is considered by some analysts as a source of support to the Australian Dollar.
The decision to raise the cash target rate to 4.10% supports a rise in Australian bond yields, to which many lending products in Australia are linked.
For indebted Australians, this pressures their finances, which the RBA hopes will ultimately slow activity and bring inflation lower. But from a currency perspective, the return on Australian financial assets becomes more attractive, prompting capital inflows that can boost the Aussie Dollar.
"June's meeting statement indicated that upside risks to inflation have increased and removed the reference to medium-term inflation expectations being well anchored," says Lee.
Standard Chartered concedes the timing of incoming rate hikes will be difficult to call, "while the door is open for more hikes, it remains difficult to assess if the RBA will continue to hike consecutively," says Lee.
Above: AUD is the best performer of the past week.
Standard Chartered thinks the RBA may skip a hike in July to assess the key quarterly inflation print (26 July).
"Thereafter, we think it will hike by 25bps each in August and September, to bring the policy rate to 4.6% (our previous projection was 3.85%)," says Lee.
Under such a scenario, the Australian Dollar will likely find some support against currencies belonging to central banks where the rate hiking cycle has either ended or is about to end.
However, global factors remain an important determinant of Aussie Dollar strength, particularly with regard to China, where the post-Covid economic recovery continues to disappoint.
Part of the Australian Dollar's underperformance in 2023 has been linked to a pulse of underwhelming Chinese data prints and softening commodity prices, meaning Australia's foreign exchange earning exports are depreciating in value.
If this trend continues then the Australian Dollar might find any upside linked to the renewed 'hawkish' stance at the RBA to be limited.
A 'sweet spot' for RBA upside would involve a resurgence in Chinese economic momentum and higher RBA interest rates.
But for now, with the global economic cycle waning, this might be some way off.