Reserve Bank of Australia (RBA) maintains hawkish bias, Australian dollar valuation updates

[Tokyo, 8th]- At its board meeting on the 6th of this week, the Reserve Bank of Australia (RBA) announced that it would leave policy unchanged, but maintained its tightening bias. The Australian dollar is expected to recover against the US dollar in the medium to short term, and in the meantime, it is likely to remain at a plateau against the yen in a risk-on environment.

In terms of valuation, the Australian dollar/yen pair seems overvalued, and last year’s high of around 98 yen will likely act as strong resistance. Even so, I believe that a fall below the 200-day line (currently around 95 yen) will be delayed until the second quarter or later.

As widely expected, the RBA this week decided to keep interest rates unchanged at 4.35%. However, unlike the US Federal Reserve (Fed) and the European Central Bank (ECB), it has maintained a distance from monetary easing.

Since the consumer price index (CPI) announced last week was on the decline, it makes sense that the RBA decided not to raise interest rates again. That said, Australia’s inflation rate is still above the RBA’s target, and inflation has not fallen as quickly as in the US or Europe.

In Australia, the employment situation continues to be solid, and the broadly defined unemployment rate (underemployment rate), which is highly correlated with wages, is currently at a level consistent with a wage increase of around 4%. This is the employment situation and wage growth rate that then-Governor Philip Lowe and Deputy Governor Guy Debelle were hoping for about five years ago.

However, such high wage growth is currently pushing up service prices and, by extension, the overall inflation rate, and is a contributing factor to the fact that inflation in Australia remains higher than that in the United States and Europe.

Writing in a local newspaper in early January this year, Finance Minister Jim Chalmers noted that inflation had fallen, but confirmed that “the fight against inflation remains a top priority for the Albanese Government.”

Although the Albanese Labor government had taken a harsh stance on former Chancellor Lowe, Finance Minister Chalmers appears to support the policy decisions of Chancellor Michelle Bullock, whom he nominated.

After taking office in September last year, the RBA’s first female RBA leader decided to raise interest rates from 4.1% to 4.35% at the November meeting, and continued to maintain a tightening bias in her statement. There is.

Moreover, the Labor government led by Prime Minister Albany Gee is currently discussing tax cuts, which could give real incomes (and ultimately personal consumption) a further boost in the second half of the year.

Australia’s unemployment rate has been on a gradual upward trend recently, but it is unlikely to clearly exceed the non-inflation-accelerating unemployment rate (NAIRU), which is expected to be around 4.5% by the end of this year. The pressure to raise wages is unlikely to ease easily.

Against this backdrop, Citigroup has withdrawn its previous forecast for further rate hikes in response to last week’s downturn in the CPI, but now expects the RBA to cut interest rates only twice this year. We believe that the RBA will not easily follow the lead of the Federal Reserve and the ECB, which are likely to take monetary easing sooner or later.

Looking at the recent overall picture of the foreign exchange market, the US dollar rebounded across the board after last weekend’s US employment statistics. However, in response to the RBA’s hawkish stance expressed at its board meeting on the 6th this week, the Australian dollar’s exchange rate against the US dollar is beginning to show signs of bottoming out.

The rebound in the Australian dollar is likely to be prompted by valuation adjustments as well. Our unique model estimate using multiple regression analysis, which takes into account factors such as interest rate differences between Australia and the United States, market risk preferences such as US stock trends, and disparities in terms of trade reflecting crude oil and resource prices, is currently 1 Australian dollar = 0. It is located around .70 USD. The current Australian dollar exchange rate, which is currently in the $0.65 range, suggests that it may be undervalued.

However, if we look at the deviation of the actual market price of the Australian dollar from these model estimates, we can see that the Australian dollar has been trending downward during this period. This makes us suspect that there are factors that are not captured in our model.

One possibility is a depreciation of the renminbi, and if we compare the downturn in the Australian dollar’s estimated value during this period with the renminbi’s exchange rate against the dollar, we can see that the depreciation of the yuan is responsible for the weakness of the Australian dollar during this period. Looks like it explains it properly.

Currently, the renminbi has been weak due in part to the Chinese government’s reflationary policy aimed at supporting stock prices. However, due in part to the Chinese government’s stock price measures, it is expected that the excessive pessimism about China will recede, at least in the medium to short term.

Under these circumstances, if the renminbi appears to be showing signs of rebounding, this will provide an additional tailwind for the Australian dollar. We don’t think the hurdles for the Australian dollar to return to around USD 0.67-0.68, which was the level at the beginning of the year, are not that high.

In contrast to the undervalued exchange rate against the US dollar, the Australian dollar’s exchange rate against the yen appears to be overvalued in terms of valuation. Similar to the exchange rate against the US dollar, we calculated a model estimate that takes into account interest rate differentials, market risk appetite, terms of trade, etc., and found that the estimate rose to around 95 yen at the end of last year. Due to the recent narrowing of interest rate differentials, the price has fallen to around 92 yen.

The actual Australian dollar/yen spot exchange rate of around 96-97 yen is about 5 yen higher than the estimated value, and appears to be overvalued. In the past, the actual Australian dollar/yen exchange rate has sometimes deviated by 4 to 5 yen from the estimated value. However, looking at the frequency of this occurrence, until now it has often been within 2 yen, and deviations of more than 3 yen have been relatively rare.

Conversely, significant upward and downward swings that reached 5 yen like this one have been corrected in a relatively short period of time. Once again, there is a high risk that the Australian dollar will weaken and the yen will appreciate in the near future.

However, in a risk-on environment in which U.S. and Japanese stocks remain firm, the Japanese yen has been under general downward pressure this year, including against the US dollar and euro, and these model estimates suggest that the yen will weaken. A tendency to diverge can be seen. It appears that the yen’s depreciation, even temporarily, is being exacerbated by the new NISA (Small Investment Tax Exemption System) and recently announced large-scale M&A (mergers and acquisitions).

Another thing to consider is that the Australian dollar/yen issue may also be a China issue. This is because, although there was no particularly strong correlation between the Japanese yen and renminbi against the US dollar until 2021, they have been trending at a surprisingly high correlation since 2022. As mentioned above, the Australian dollar’s exchange rate against the US dollar also tends to fall when the renminbi depreciates, but the recent depreciation of the yuan may have put stronger downward pressure on the Japanese yen.

As mentioned above, we believe that the renminbi will rebound against the US dollar in the medium to short term, and depending on market sentiment at the time, the Japanese yen will rebound not only against the US dollar but also against the Australian dollar. I think there is a possibility.

However, the renminbi has not yet overcome its weakness, and the yen’s depreciation pressure continues to smolder due to the depreciation of the yuan in the foreign exchange market.

We are wary of the risk of a fall in the Australian dollar and yen in the long term, and believe that it would not be surprising for the exchange rate to fall to around 90 yen in the second half of this year. As mentioned above, the current model estimate is around 92 yen, which is generally consistent with this forecast.

However, considering the current risk-on environment and the depreciating yuan that we have pointed out so far, it is hard to imagine that a decline below the 200-day line (currently around 95 yen) will occur in the near term, and that will be delayed until the second quarter or later. I’m staring at Dero. Although there will be strong resistance at around 98 yen, I think the Australian dollar/yen pair will continue to remain on a plateau with this upper limit in the first quarter.

Editing: Kazuhiko Tamaki

(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal views)

*Osamu Takashima is a currency strategist at Citigroup Securities. He joined Mitsubishi Bank (currently Mitsubishi UFJ Bank) in 1992, served as chief analyst since 2004, and transferred to Citibank in March 2010. Since May 2013, he has been with Citigroup Securities.

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2024-02-08 22:50:00
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