FX | Economy
FX Focus - AUDCAD – Contrast Within Commodity-Driven Economies
Posted on| Forecast | Spot | 0 - 3m | 6 - 12m | Long-term |
|---|---|---|---|---|
| AUDCAD | 0.9125 | 0.9250 | 0.8960 | 0.9500 |
*Forecasts as of July 2024.
- Reserve Bank of Australia’s (RBA) June Monetary Policy meeting saw the Board acknowledging both the higher-than-expected Q1 inflation print and uptick in the May unemployment rate. But the Statement also alluded to the positive fiscal impulse from the recent Federal and State budgets that “may have a [positive] impact on demand” and added a hawkish final sentence that the Board “will do what is necessary to achieve that outcome”, in relation to returning inflation to target. The RBA also indicated it had considered hiking rates again in June but decided to stick on the “narrow path” for now. Ultimately the Governor’s bottom line was the Board is not “ruling anything in or ruling anything out” with respect to further rate hikes.
- Then came the inflation overshoot in Australia’s monthly May CPI data (up 4.0% YoY versus 3.8% YoY expected) which seems to have decidedly tilted risks towards further RBA tightening. AUD rates markets now price a 60% probability of a 25bp hike by the RBA in October. This is in marked contrast to virtually all of RBA’s G10 peers who have either commenced or will likely start, their rate cut cycle by H2’2024. Whether the RBA hikes or not, what seems more certain is that the RBA will likely be the last among its G10 peers to commence easing financial conditions. Markets do not expect any RBA rate cuts until mid-2025 at the earliest with only limited follow through expected (one to two cuts) by end-2025. Meanwhile, the BoC has already commenced its rate cut cycle by lowering the cash rate by 25bp to 4.75% at its June meeting and CAD rates markets discount a further 50bp in cuts to 2024-end to 4.25% and a further 75bp in cuts to 2025-end for a similar terminal rate to the RBA at ~3.5% (RBA’s current cash rate of 4.35% is 40bp lower than BoC’s current rate of 4.75%).
- A faster and deeper pace of BoC rate cuts relative to the RBA is likely given job growth in Canada continues to run slower than the strong population growth, with the unemployment rate rising to 6.2% in May. A further weakening in H2’2024 in line with a deteriorating US labor market could well see Canada’s unemployment rate rising towards 6.5%, a rather uncomfortable scenario for the BoC. The widening in Canada’s output gap would also imply further downward pressure on inflation and wages that would likely make the BoC comfortable in cutting rates further. In contrast, Australia’s household consumption is likely to pick up in H2’2024 thanks to stage 3 tax cuts and still positive wealth effects from rising house prices. The tight labor market is also expected to loosen only moderately in H2’2024, implying a year-end unemployment rate of 4.3%. This is likely the catalyst for an increase in wages and salaries, which could continue to put upside pressure on inflation and potentially put AUD on a stronger footing against CAD as the RBA hikes further while the BoC is lowering rates at the same time, leading to a sharp narrowing in CAD – AUD rate differentials in H2’24 in favor of the latter.
AUDCAD - Aussie on the comeback trail?
Source: Bloomberg, July 1, 2024
