AUD: Soft Domestic Data Meets Optimistic FX Forecasts

Key Moments

RBA Seen Pausing After Weak Labor and PMI Data

ING analyst Francesco Pesole notes that recent Australian macroeconomic releases have reinforced the case for a more cautious Reserve Bank of Australia. He highlights that a weaker-than-expected labor market report and deteriorating purchasing managers’ indices have undermined expectations for additional monetary tightening.

According to Pesole, the latest jobs data triggered a pullback in the Australian dollar, which he characterizes as having been in overbought territory prior to the release. He points to a rise in the unemployment rate to 4.5% in April, alongside a decline of 18.6k in total employment, with full-time positions bearing a larger share of the losses.

He also underlines that PMIs have taken a negative turn, with the composite index falling from 50.4 to 47.8, a move that places the indicator firmly in contraction territory.

Monetary Policy Expectations and Market Pricing

Pesole argues that this combination of weaker labor market conditions and downbeat survey data strengthens the justification for the RBA’s cautious tone following its May interest rate increase. He states that these developments have cooled what he describes as still-hawkish expectations for policy by the end of the year.

He reiterates ING’s baseline scenario that the RBA will refrain from further increases, even though he notes that market participants continue to fully price one additional rate hike by November.

Constructive View on AUD/USD Despite Dovish RBA Call

Pesole emphasizes that ING’s relatively dovish stance on RBA rate prospects does not alter its positive outlook for AUD/USD. He explains that the firm sees greater downside risks for front-end US yields, while the Australian dollar continues to offer appealing fundamentals and carry characteristics.

He notes that the currency’s high-beta profile makes episodes of correction, such as the reaction to the latest data, a normal feature of its trading behavior. Despite the current setback, he says ING maintains strong confidence in the potential for further AUD/USD appreciation into the end of the year, contingent on geopolitical developments.

“Its high-beta nature makes corrections like the current one inevitable, but we retain a rather strong conviction on further AUD/USD gains into year-end, assuming a Middle East agreement is ultimately reached. Our summer target remains 0.73.”

“A poor jobs report in Australia overnight hit the overbought AUD. Unemployment rose to 4.5% as employment dropped 18.6k in April, with a larger share of full-time job losses. PMIs were also pretty grim, with the composite gauge falling from 50.4 to 47.8, well into contraction levels.”

“All this endorses the cautious stance of the Reserve Bank of Australia after the May rate hike and has poured cold water on still-hawkish expectations for year-end. Our call remains for no more hikes in Australia, with markets still having one fully priced in by November.”

“But our more dovish view on the RBA does not translate into a less bullish view on AUD/USD. We see even greater downside risks for USD front-end yields, and AUD’s overall fundamentals and carry story remain highly attractive.”

“Our summer target remains 0.73.”