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The stronger the system, the more opportunities the central bank has to raise rates. The stronger its currency. In this regard, the Australian dollar looks attractive. Australian banks are well capitalized, their stability is beyond doubt, which allows the RBA to continue tightening monetary policy without looking behind its back. However, this alone seems not enough—the AUDUSD pair has been standing in the same place for a long time, and only the Fed meeting allowed it to move from this place.
The pressure on the Reserve Bank from politicians, mixed macro statistics, and the banking crisis forced the futures market to lower the estimated cash rate ceiling to 3.6%. That is, to the level where the rate is now, which suggests the end of the monetary tightening cycle. Bloomberg experts, on the contrary, are set on its continuation. They see the peak at 3.85%, slightly lower than the 4.1% a couple of weeks ago, but leaves the door open for further increases in the RBA's borrowing costs.
Economists expect GDP growth to slowdown from 2.4% in the first quarter to 1% in the fourth quarter and inflation from 7.1% to 4.1%. They raised the probability of a recession over the next 12 months from 35% to 40%.
Dynamics of cash rate and inflation in Australia
Thus, experts naturally believe that the tightening of the monetary policy of the RBA will cool the economy and gradually return inflation to the target. At the same time, the proximity of the end of the rate hike cycle is rather a "bearish" factor for the Australian dollar, and the banking system stability is "bullish."
Even though ANZ Bank, Westpac and other banks and investment companies urge the RBA to continue what they started, ignoring external shocks, practice shows that the external background plays a key role in the process of AUDUSD exchange rate. The pair tends to rise when global risk appetite increases, reflecting a rally in U.S. stocks. Now this is not the case, as the stock market does not yet know what to do. Should we rejoice at the nearing end of the monetary policy tightening cycle? Or worry about a new wave of banking crisis?
The latter may lead to a recession, the Australian dollar's reaction to which is also ambiguous. History shows that the year before the recession and the year after, the Aussie lost out against safe-haven currencies such as the Swiss franc, the U.S. dollar and the Japanese yen but outperformed emerging market currencies and its New Zealand namesake.
Reaction of currencies to recession
In my view, the Aussie is an average currency before the Chinese economy booms. Both inside and outside of Australia, it has both trump cards and vulnerabilities.
Technically, on the daily chart of AUDUSD, there is an assault of the fair value at 0.673. If the "bulls" succeed, we will be able to increase the long positions formed from 0.665 and expect the pair to move to 0.685.
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