The Australian Dollar is weighed up as RBA’s pivot may be slower than Fed’s

While global major central banks’ pivots have become vital this year and going forward, currencies, including the AUD, could be influenced as well.

Pertaining to interest rate futures, the RBA has recently been viewed to pivot more slowly than the Fed (i.e., Fed’s rate cuts implied to be faster than RBA’s). This may weigh up AUDUSD, given that, during the tightening cycle from 2022 to late 2023, Fed’s faster rate hikes than RBA’s on the contrary have weighed down AUDUSD (Figure 1).

However, history says that, after the RBA started to cut rates, the AUD—in view of AUDUSD and AUD NEER—seems to be tilted to the downside, provided the downward biasness of means, medians, as well as interquartile and 10-90 percentile ranges (Figure 2).

Moreover, regarding long-run prospects, varying PPP estimates—ranging about 0.66-0.74—overall suggest that AUDUSD, currently around 0.66-0.67, may be undervalued (Figure 3).

In sum, AUDUSD looks to be weighed up by the RBA’s slower pivot compared to the Fed’s, coupled with long-run PPP undervaluation. Yet, be cautious with the empirical evidence of possible weaker AUD after RBA’s first rate cuts.