ING RAISES AUD/USD TARGET TO 0.71 AS RBA HIKE EXPECTATIONS BUILD
ING has raised its short-term AUD/USD target to 0.71, citing the Australian dollar’s strong October and its attractive yield advantage. However, the bank does not expect AUD/USD to climb back to 0.72 this quarter, as a hawkish Federal Reserve is expected to keep the US dollar supported.
ING expects the Reserve Bank of Australia (RBA) to raise its cash rate by 25 basis points to 4.85% at its 3 November meeting, rather than waiting until December. Markets are currently pricing around 20 basis points of tightening for next week, slightly below a full 25bp increase. According to ING, AUD/USD is driven mainly by short-term interest rate differentials.
Australian inflation data also support ING’s expectations. Headline consumer prices rose 4.3% from a year earlier in September. Goods and services inflation are both above 4%, and core inflation accelerated on both annual and quarterly measures. The trimmed mean rose to 3.7%, above forecasts.
ING concluded that underlying inflation is not on a sustained downward path, which weakens the case for a policy pause. At its previous meeting, the RBA raised rates unanimously and signalled it was prepared to accept some softening in the labour market, according to ING.
On the other side of the pair, ING says the Fed’s stance remains the main external constraint on AUD/USD.
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