MNI Insight: Australian Macro Chart Pack- RBA To Tighten Further, AUD Still Undervalued

Executive Summary:

• Model estimates suggest the RBA still has more work to do, but market pricing indicates the RBA cash rate is close to a peak (Slides 4-5). Markets expect the Fed rate to remain above the RBA cash rate for sometime (Slide 6) but the Fed is likely to be a bigger driver of this trend in 2023.
• Inflation & wage dynamics (Slides 7-10) will determine how much further the RBA tightens. The labour market remains tight (Slides 11-13) but employment growth is expected to cool in 2023. Housing & the flow on effect to consumer spending (14-18) are other key watch points for the RBA, particularly in terms of the cumulative impact of tightening through 2022. The RBA and consensus (Slides 19-21) expect weaker growth and inflation trends through 2023.
• The outlook for trade and the terms of trade is mixed in 2023 (Slides 22-24). China’s pivot away from CZS should be supportive (Slide 25), but expected weaker conditions in the rest of the world are a headwind (Slide 26). A Fed pivot should weigh on the USD all else equal and be a A$ positive (Slide 27), while simple valuation metrics continue to suggest the currency is undervalued (Slide 28).
• Global recession risks (Slide 29) can’t be discounted though, historically a meaningful AUD headwind. Correlations for AUD/USD remain strongest with commodity prices (particularly metals) and global equity trends (Slide 30).
• See the full chart pack here:

Australia Macro January 2023 (final Jan 25).pdf