Australian Dollar Forecast: Two Rate Hikes from RBA this Year Says Rabobank

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The Australian Dollar can look forward to the support of a central bank that is not done hiking, according to new research.

Rabobank says Australia's quarter-one inflation figures, released on April 25, showed inflationary dynamics were picking up again. "Inflation is resurgent, raising risks that the RBA's cautious approach has left it behind the pace on monetary tightening," says Benjamin Picton, Senior Macro Strategist at Rabobank.

The Australian Dollar was the best-performing major currency on the day the ABS said CPI inflation rose 3.6% year-on-year in the first quarter, which was stronger than the 3.4% outturn the market was expecting. But, the suite of core inflation readings showed where the real trouble was brewing: the weighed mean accelerated from 0.9% to 1.1% q/q while the trimmed mean quickened from 0.8% to 1.0% q/q.

"There are signs that the Australian economy is gathering steam, and asset markets are sending signals that financial conditions are too accommodative," says Picton. In short, the cost and access to credit in Australia are too easy, and this is underpinning the strong demand that drives inflation.

Rabobank has revised its RBA policy rate forecast to include two further 25bps hikes (August and November of 2024) to reach a terminal rate of 4.85%, slightly above its Fed Funds forecast.

What's more, Rabobank has removed future cash rate cuts from its forecast in accordance with its house view that Donald Trump will win the U.S. election and enact structurally inflationary universal tariffs.

What will happen to the Australian Dollar if the RBA raises interest rates again?

Rabobank's Senior FX Strategist, Jane Foley, says the RBA was always in the running to potentially be the last major central bank to ease policy this cycle.

"Our hawkish outlook for the RBA underpins our view that AUD/USD could return to 0.70 early next year," says Foley.

Central bank interest rate expectations are a key driver of foreign exchange value: when markets anticipate higher interest rates at a central bank relative to other central banks, the currency it issues tends to appreciate.

European central banks are still expected to cut interest rates in 2024 owing to softer growth dynamics, meaning the Australian Dollar will benefit from an obvious relative rates advantage against the likes of the Euro and Pound. But its rate advantage will even apply to the U.S. Dollar.

Rabobank's point forecasts for the Australian-U.S. Dollar exchange rate are 0.66 (three months) 0.67 (six months), 0.70 (nine months) and 0.70 (12 months).

For the Pound to Australian Dollar exchange rate, the point forecasts are 1.89, 1.88, 1.84 and 1.85, respectively.

For the Euro to Australian Dollar, the forecasts are 1.60, 1.58, 1.54 and 1.56, respectively.