AUD/USD to struggle to post further gains – MUFG

The Reserve Bank of Australia (RBA) did not attempt to stall the sell-off in April 2024 notes even as yields climbed to 0.81% against its target of 0.10% following the rise in core inflation to 2.1%. The aussie is marginally lower today despite this huge bond yield move. However, since the end of September, AUD/USD is 5% higher. But gains going forward will prove more of a struggle, in the opinion of economists at MUFG Bank.

RBA fails to maintain government bond target

“The RBA chose not to step into the market to take down the yield on the April 2024 government bond, which effectively is a signal of abandoning a key monetary policy commitment without any formal communication to the markets.”

“The failure to cap yields means all guidance is potentially up for change when the RBA meets next Tuesday. We believe the yield curve cap will be abandoned and consistent with that the RBA will also drop its view of inflation not reaching 2%-3% sustainably before 2024. That will essentially endorse the markets view of rate hikes sooner than what the RBA was implying.”

“But like elsewhere the rate curve in Australia has gone too far and hence the RBA next week is also likely to push back on the extent of monetary tightening priced. Around 90bps of tightening over the next 12 months is excessive but the markets may well ignore any attempted push-back for now.”

“Limited further commodity price gains given the moves we’ve already had plus China growth slowing will temper AUD gains from here.”