AUD/USD is set to move in a narrow range over the near term, in the view of economists at HSBC.
AUD/USD to be pushed higher by shorter-term yield differentials, but pulled lower by market risk sentiment
The shorter-term yield differentials between Australia and the US have generally pushed AUD/USD upwards over the past few months. With the estimated time for inflation to return to the target band still as late as mid-2025, the RBA is likely to have little tolerance for upside surprises.
With markets pricing in only 30 bps of cuts by end-2024 (Bloomberg, 6 July 2023), growth concerns may not cap shorter-term Australian yields. However, a broader economic recovery in mainland China and a brighter outlook for Australia’s key exports are still missing, which may weigh on market risk sentiment, pulling AUD/USD downwards.
We see a push-and-pull dynamic leaving the pair trading in a range-bound fashion over the near term. Until there are improving fundamentals and an eventual end to the Federal Reserve’s tightening cycle, there may be little decisive direction for AUD/USD.
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