AUD: Tailwinds to stay despite Budget impact AUD: Tailwinds to stay despite Budget impact AUD: Tailwinds to stay despite Budget impact

AUD: Tailwinds to stay despite Budget impact

Forex 3 minutes to read
Charu Chanana

Head of FX Strategy

Key points:

  • Australia’s federal budget announcement due today is expected to ease household pressure without driving inflation higher.
  • The budget is unlikely to impact the RBA rate path, with the central bank remaining a laggard in the G10 easing cycle.
  • AUD is also focused on China's stimulus announcements, Biden administration’s potential tariffs on China, and US inflation data.
  • Despite these factors, AUDUSD could remain supported on dips.

 

It’s a busy week for AUD traders. First up is the Australian government’s presentation of the 2024-25 Budget on May 14 at 0930 GMT. On Sunday, Treasurer Jim Chalmers stated that the new Budget would ease household pressure without driving inflation higher. Treasury predictions in the budget show inflation dropping to 2.75% by December, which means inflation will be back in the 2-3% RBA target range. This is quite dovish compared to RBA’s outlook of CPI to remain at 3.8% until December before falling to 3.2% in June 2025 and 2.8% in December 2025. Hence, the budget announcement is likely to underscore the case of no more rate hikes from the RBA, and could even leave the door open to price in rate cuts for this year if inflation surprises to the downside.

The budget announcement will also underscore that Australia’s fiscal position is comparatively better than many other DM economies. Figures from Treasury showed the government is expected to post a surplus of A$9.3 billion ($6.14 billion) for the fiscal year to June 2024, after a A$22.1 surplus last year, marking the first back-to-back budget surplus in nearly two decades. This will allow for some tax and spending measures targeted towards easing the cost-of-living pressures, however inflation remains top of mind for Australian administration, and spending is likely to be targeted to key strategic sectors such as defense, infrastructure, critical minerals, green energy, housing and education.

Overall, the budget announcement is likely to be neutral-to-negative for AUD in the short run, while it could fuel bullish bets on AUD in the medium-to-long term. RBA’s rate path is unlikely to be altered by the budget announcement, and it could still well be the last of the G10 central banks to cut rates.

However, there are several other factors beyond the budget that can influence volatility in AUD over the course of this week. This includes:

  1. Potential tariffs announcements from the Biden administration on China’s strategic sectors such as EVs: AUD negative
  2. Further stimulus measures from China to support the economy: AUD positive
  3. US inflation readings, from PPI today to CPI tomorrow. There are increasing risks of hard data slowing down in the US, and the Fed has shown inclination to stay away from rate hikes. If core CPI comes in softer as well, that can prompt a bearish turn for the US dollar: AUD positive

Overall, this means AUDUSD could be supported on dips. Plenty of supports also on the downside with 23.6% fibo retracement at 0.6580, 100DMA at 0.6571 and 200DMA at 0.6523. AUD upside could also be more evident on crosses, especially against currencies where there may be scope for dovish repricing of central bank paths or currencies that can continue to be a funding currency to fuel carry trades in low vol environment. This could mean CAD, GBP or CHF.

Source: Bloomberg

Appendix: Here are the top priorities for Australia's upcoming federal budget announcement, from what ChatGPT tells me:

  • Cost-of-Living Relief: One of the major expectations is the continuation of measures to alleviate cost-of-living pressures. This includes extending energy bill relief and targeted support for families and small businesses. For instance, eligible families might receive up to A$500 off their power bills, while small businesses could get up to A$650.
  • Tax Reforms: The implementation of the Stage 3 income tax cuts, set to take effect on July 1, 2024, is confirmed. These cuts will adjust the tax rates and thresholds, offering reductions for all taxpayers. There is also talk of further modest but meaningful tax reforms to incentivize business investment and support economic growth.
  • Green Energy Transition: Significant investments in renewable energy and green technologies are anticipated. The budget is likely to include funding for critical minerals, renewable hydrogen, and battery manufacturing to support Australia's net-zero emissions targets.
  • Defense and Infrastructure Spending: Increased defense spending and substantial investments in infrastructure projects, particularly in Western Sydney, are expected. This includes a A$50.3 billion boost for the military and A$1.9 billion for road upgrades and other infrastructure.
  • Support for Vulnerable Groups: Enhanced support for people fleeing domestic violence, including financial aid and housing support, is planned. Additional measures to improve safety and provide resources for those affected by domestic violence will be included in the budget.
  • Economic Stimulus and Workforce Development: The budget aims to stimulate economic growth through targeted tax incentives and investment in workforce development. This includes funding for fee-free TAFE and vocational education places to address skill shortages and improve productivity.

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