ING’s Francesco Pesole highlights that recent Australian economic data has been soft, with the unemployment rate rising to 4.5% and employment dropping by 18,600 in April, including a significant loss of full-time jobs. Additionally, the composite Purchasing Managers' Index (PMI) fell from 50.4 to 47.8, indicating contraction in economic activity. These developments have reinforced a cautious stance from the Reserve Bank of Australia (RBA) following its May rate hike, and have dampened market expectations for further tightening, even though markets still price in one more hike by November [1].
Despite the weak data and a more dovish outlook on the RBA, ING maintains a constructive view on the Australian dollar (AUD), particularly against the US dollar (USD). Pesole cites attractive fundamentals and carry for the AUD, as well as greater downside risks for US yields, as reasons for this positive outlook. He notes that while the AUD’s high-beta nature makes corrections like the current one inevitable, ING retains strong conviction for further AUD/USD gains into year-end, with a summer target of 0.73, contingent on a US-Iran agreement being reached [1].
Overall, the market reaction to the soft data has been negative for the AUD in the short term, but ING’s forward-looking analysis suggests potential for recovery and gains later in the year, provided certain geopolitical conditions are met [1].
CONCLUSION
Despite recent weak labor and PMI data in Australia, ING remains bullish on the Australian dollar’s prospects for year-end, citing strong fundamentals and carry. The RBA is expected to pause further rate hikes, but downside risks to US yields and potential geopolitical developments could support AUD/USD gains.