Goldman Sachs: Reasons For Caution Despite Broad Commodity Bull Market

Goldman Sachs note that "despite generally rising commodity prices, Australia-specific factors may continue to hold back AUD/USD vs. other USD crosses. Most importantly, the OIS curve substantially over-prices our expectations for policy rates, and our rates strategists now see a sufficiently compelling case to own the Aussie front end. At this week's RBA meeting, market focus will likely be on any signals given around the future of the YCC and QE programs. Heading into the meeting, AUD front-end rates fully discount a 15bp hike by mid-2022, and a total of 110bp of hikes by the April 2024 bond maturity date. This looks extreme relative to the Bank's latest cash rate guidance and our economists' own view for lift-off criteria to only be met in 2024. We expect the Bank to manage market expectations lower over time as the Bank reiterates the long timeline to full employment and at-target inflation and reinforces YCC target (the April 2024 bond) despite a firmer near-term outlook. A likely further expansion of the QE program size by the RBA would also solidify any inner bound on the lift-off timeline. In addition to potentially lower front-end pricing, weaker iron ore prices may weigh on AUD/USD. Despite their recent surge, our commodity strategists expect that iron prices will fall over the next 12 months."