AUD Q2 2021 Fundamental Forecast

Australian Dollar to Face Rising US Yields as RBA Sticks to QE Program

The Australian Dollar appreciated against its US counterpart during the first quarter of 2021, with AUD/USD briefly trading above the 0.8000 handle in February. But now the recovery in longer-dated US Treasury yields appears to be dragging on the AUD/USD exchange rate.

The Reserve Bank of Australia (RBA) acknowledges that “the rise in longer-term government bond yields in advanced economies over preceding months had predominantly reflected an increase in compensation for future inflation.”

The minutes from the RBA’s March meeting goes on to say that although central banks had not announced material changes to their asset purchase plans or guidance on policy rates since the previous meeting, market participants had brought forward their expectations for an increase in policy rates in a number of economies, including Australia.

The Board notes that the change appeared to be sooner than implied by market expectations and central banks’ forward guidance. The comments suggest the RBA is in no rush to switch gears as “inflation was expected to remain below 2 percent over both 2021 and 2022.” It seems as though the central bank plans to overlook a transitory rise in price growth as officials insist that it would be some years before the Bank's goals for inflation and unemployment are achieved.

As a result, the RBA may continue to utilize its quantitative easing (QE) program throughout 2021 as ”a further $100 billion will be purchased following the completion of the initial program.” It also seems as though Governor Philip Lowe and Co. are on a pre-set course as the board pledges to not increase the cash rate until actual inflation is sustainably within the 2-3% target range.

ASX 30-Day Interbank Cash Rate Futures (April 2021 Contract)

AUD Q2 2021 Fundamental Forecast

Source: ASX

However, the ASX 30 Day Interbank Cash Rate Futures reflect speculation for an RBA rate cut, with the April 2021 contract indicating a 87% expectation of an interest rate decrease to 0.00% at the next RBA Board meeting.

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