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Market Insights

Aussie to get a budget boost?

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Amidst the chaos of recent weeks, the Australian dollar’s held up well and sits in a really interesting spot as we head towards Q2.

Let’s take a look at the AUDUSD chart:

AUDUSD one day price movement

Plenty to take note of there. A few things really stand out.

  • AUD is above the 20, 50, and 200 day moving averages.
  • AUD breaking out of the descending channel
  • AUD approaching a 50% retracement of the 11 month downswing

Away from the charts, CFTC positioning data (to 15th March) also showed a large reduction in AUD shorts by leveraged funds. Some have suggested that a short squeeze may have been a big driver of the recent Aussie rally.

The Big Budget Boost?

Australian Treasurer Frydenberg will release the Federal Budget on Tuesday March 29th. In a recent speech he stated that:

“This year’s Budget will see a continuation of our economic plan with further investments in infrastructure, skills, digital transformation, energy, our regions and Australia’s sovereign manufacturing capability.”

There’s a balance to be found however. The Australian economy has undoubtedly recovered from the pandemic, with real GDP growth for 2022/23 expected to be upgraded from 3.5% to 4.25% and the unemployment rate down to just 4%.

BUT (why is there always a but?) the Westpac Mcdermott Miller consumer confidence index just hit new lows…

  • “Consumer confidence has continued to tumble in recent months and is now the lowest it has been since the Global Financial Crisis in 2008.”
  • “Households have reported that their financial position has deteriorated as the economy has been buffeted by a multitude of headwinds.”
  • That includes rising consumer prices and higher mortgage rates, both of which are squeezing households’ disposable incomes.

The Treasurers’ challenge is to deliver a Goldilocks budget: Just enough pullback from the pandemic emergency settings, but not too much that it fails to support the economy. Tough task. Especially as the RBA hasn’t started tightening monetary policy yet.

The RBA is lagging the Fed. The 2 year yield spread widened significantly from 40 bps to 58.4 bps this week. At one point, it was as wide as 68 bps. For context, Goldman Sachs analysts now expect the Fed to hike 50 bps at both the May & June meetings. CME FedWatch shows the odds of this at 65-70%.

In contrast, RBA Governor Lowe gave a speech on Tuesday reiterating that the RBA

“will not respond until there is evidence of pervasive price pressures”.

Nevertheless, money markets still expect the RBA to begin hiking at the June meeting.

For now, the tailwind of soaring commodity prices has seen the Aussie benefit, but recession talk is increasing. One big risk is demand destruction. As the saying goes, “the cure for high prices is high prices”.

Vitol’s CEO commented on Tuesday that they are already seeing demand destruction in the oil and gas markets due to high prices.

If consumers continue to be squeezed, commodity prices may well suffer as demand slows. For commodity currencies such as the AUD, this could mean a tailwind turns into a headwind.

Not investment advice. Past performance does not guarantee or predict future performance.

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