Citigroup isn't changing its tune. The U.S. bank is sticking to its forecast that the Reserve Bank of Australia (RBA) will raise key interest rates by 25 basis points at its August meeting. A scenario that could give the Australian dollar a boost. Not exactly the move we're most expecting this summer. 🇦🇺
🔍 What’s happening?
Citi stands by its forecast. In a recent note, the bank reaffirmed its expectation of monetary tightening by the RBA next August. This stance goes against the grain of many observers who are instead betting on the status quo, or even easing.
The AUD/USD is currently trading at 0.7165, in a consolidation zone. The market does not seem to have priced in this bullish scenario. If Citi is right, the pair could see a significant upward move in the coming weeks.
💡 Why does this matter?
For those of us trading currencies, an RBA rate hike would completely change the game for the AUD. The interest rate differential with other major central banks would widen in Australia’s favor, making the Australian dollar more attractive for carry trades. The AUD/JPY and AUD/CHF pairs would be particularly impacted.
The macroeconomic context also plays a role. While the Fed and the ECB are on a path toward the end of their rate-hiking cycles, or even stabilization, an RBA tightening its policy would create an interesting decoupling. Australian inflation clearly remains a concern for the central bank, unlike in other developed economies where it is slowing significantly.
📊 Our view
We tend to side with Citi on this one. Australian fundamentals warrant increased vigilance from the RBA.
The Australian economy is showing surprising resilience, driven by robust commodity exports and a tight labor market. Core inflation remains above the central bank’s target, and wages are accelerating. In this context, a prolonged status quo could fuel inflationary pressures. The RBA has historically shown that it does not hesitate to act out of step with other major central banks. In Europe, the ECB is closely monitoring the divergent paths of central banks, and the AMF regularly reminds French investors of the currency risks associated with unhedged foreign exchange positions.
We see AUD/USD targeting the 0.73-0.74 range by the end of August if this scenario plays out. For French traders: keep an eye on the release of Australian inflation figures in mid-July; they will be key to validating or invalidating Citi’s thesis.
✅ Key Takeaways
- Citigroup maintains its forecast for a 25-bp rate hike by the RBA in August
- AUD/USD is trading at 0.7165, without having priced in this hawkish scenario
- A rate hike would make the AUD attractive for carry trades against the JPY and CHF
- Australian inflation remains above the central bank’s target
- Keep an eye on mid-July Australian inflation data as a potential catalyst
What do you think? Do you think the RBA will really dare to raise rates while the rest of the world is slowing down?
🔎 See also
For more insights, check out all our Forex analyses on ActuTrading Forex 📈
Source: Citigroup
