AUD - in favour?

In early May Rabobank changed its house view on the outlook for RBA policy. Since then, we have been forecasting two more RBA hikes this year in August and November. The view was based on indications that the downtrend in CPI inflation in Australia had stalled. Most recent Australian economic data have cemented our expectations for further rate hikes this cycle, with May retail sales registering a stronger than expected 0.6% m/m. Clearly, this view is now shared by other market forecasters, though it is not universally held. Coincidentally, it is Rabobank’s house view that the Federal Reserve will cut rates twice this year, starting in September. Given that recent data have also been suggesting that the US economy is losing momentum, broad market hopes for a September announcement from the Fed has been building. Consequently, the USD is one of the poorer performing G10 currencies on a 1-month view, while the AUD is the best performing. We maintain our target of AUD/USD0.70 and have brought this forward from a 9-month view to a 6-month forecast. We have also adjusted our 1 and 3 month targets up slightly. We see scope for a steeper move in EUR/AUD and hold a 6-month target of 1.51.