RBA lost to the market. Forecast as of 02.11.2021

It is generally accepted that markets follow central banks, but the opposite is often the case. A typical example is the refusal of the Reserve Bank of Australia to target bond yields. How will this affect AUDUSD? Let us discuss the Forex outlook and make up a trading plan.

Weekly Australian dollar fundamental forecast

Looking at the recent Forex events, there is a feeling that the markets are testing the strength of the central banks and actively mocking them. Loonie has not been able to capitalize much on the Bank of Canada’s unexpected tapering of the QE program. The euro price soared, although the ECB noted that investors’ expectations about the timing of the rate hike were wrong. Finally, the Aussie collapsed, although the RBA refused to control the yield curve and hinted that the cash rate could rise not in 2024 but in 2023.

As a rule, a change of expectations of an increase in the main interest rate to an earlier period is a bullish signal for the national currency, but not in the case of the RBA. The market considered the peaceful prospects of the central bank untenable even before the November meeting of the regulator. Its instruments signalled a 15 bps increase in the cash rate by May and two more monetary restrictions by the end of 2022. Bloomberg experts expected the rate to rise in early 2023. The Reserve Bank was hampering both. Finally, in November, the RBA did what was expected of it, followed by a AUDUSD sell-off on the facts.

According to the head of the central bank, Philip Lowe, given that other market interest rates have changed in response to the increased likelihood of higher inflation, the effectiveness of the yield target in Australia has decreased. Simply put, when debt rates rise around the world, the RBA is unable to target yield. Indeed, how can you keep it at 0.1% if the market is showing 0.8%?

Dynamics of the yield of 3-year Australian bonds

   

Source: Bloomberg.

The lowering forecast for Australia’s GDP growth to 3% in 2021 and rather modest inflation estimates (2.25% this year and 2.5% by the middle of the next) put pressure on the Aussie.

Does the Reserve Bank have reversed the AUDUSD mid-term uptrend? I do not think so. Yes, the bulls exited long trades. Yes, the upcoming FOMC meeting and the release of US employment data could push the pair down even further. Markets, however, are still expecting a cash rate hike in 2022. Australia’s fourth-quarter GDP acceleration after the end of lockdown seems to be a done deal, and the Aussie is likely to benefit from the strength of the commodity market, including the energy crisis.

Dynamics of expectations of a cash rate increase

Source: Bloomberg.

I don’t think the Fed will aggressively tighten monetary policy. After strong September’s PCE and wages data for the third quarter, CME derivatives began to signal about three acts of monetary restriction in 2022. I believe that the Fed does not make such plans yet, so the derivatives market estimates look overstated, which suggests that the US dollar is slightly overbought.

Weekly AUDUSD trading plan

This circumstance, along with the strength of the commodity market and the Australian economy and the earlier start of the monetary normalization of the Reserve Bank of Australia than their officials claim, allows me to recommend buying AUDUSD when the price rebounds from supports at 0.742 and 0.736.

  

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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