Westpac notes that the Reserve Bank of Australia’s (RBA) refusal of a potential rate hike in 2022 undermined yields and triggered a correction in the Australian dollar.

Commodity prices have generally fallen, but Westpac still expects global fundamentals to support the Australian currency, especially with the strong immunization program progressing strongly.

Overall, Westpac expects the Australian dollar to dollar (AUD / USD) exchange rate to find support in the 0.7365-0.7380 range with room for medium-term gains.

AUD / USD was trading around 0.7370 on Friday.

Reserve Bank of Australia triggers yield correction

Westpac notes that the RBA has aggressively pushed back market expectations regarding the potential for an interest rate hike in 2022.

“While abandoning the April 2024 yield target, Lowe categorically stated that” the latest data and forecasts do not justify an increase in the cash rate in 2022 “.

RBA rhetoric will tend to keep short-term downward pressure on yields, but Westpac expects there to be limited scope for further decline in yields, especially if there is solid economic data.

“It probably still has a way to go, although any further signs of an economic rebound in key data for the week will limit the decline in yields.”

There will be more optimism that Australia’s vaccination program will allow further easing of restrictions and boost domestic activity.

External trends also on the agenda

Commodity price trends will also have a significant impact on the Australian currency with a particular focus on the outlook for the Chinese economy.

Westpac notes that commodity prices have fallen and expects this process to continue and have a significant impact on Australia’s trade balance.

Nonetheless, trade performance will still be strong and Australia is also a net exporter of energy, which will support the trade account and the currency.

Banknotes; “Of course the trade surpluses continue, so Australia’s external position still provides insulation for the Aussie.”

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