Goldman Sachs: The AUD One Out

Goldman Sachs note that "following a surprisingly hawkish FOMC meeting, focus has turned to the prospects for tighter policy across the G10s; and given Australia's rapid economic recovery and an RBA meeting fast approaching, much of that focus has centered on future RBA policy. While the market has priced in a number of hikes by 2024, our economists still expect that the RBA will not initiate lift-off until May 2024, as currently implied by their April 2024 YCC target and forward guidance. This is generally due to the fact that the inflation and employment hurdles for the RBA to change policy are fairly high. Inflation has remained persistently below the midpoint of the RBA's target band for a number of years, and recent inflation pressures have been subdued. In Q1, headline CPI inflation picked up slightly to 1.1%, but disappointed expectations and was well outside of the 2-3% target. RBA Governor Lowe has emphasized that for inflation to be sustainably within the RBA's target range, "it is likely that wages growth will need to be sustainably above 3%." Currently, wage growth is somewhat weak at 1.5%, and our economists expect it to accelerate slowly back to 3% only by 2024. Additionally, the RBA's emphasis on realized outcomes, as opposed to forecasts, coupled with only one data point on wages growth before the November Statement on Monetary Policy imply that it would take quite a fast recovery in wages to result in near-term policy changes. Nevertheless, our economists estimate a material (40%) chance of a hike in the chase rate in 2023, but given lack of hard data, it's unlikely that this kind of policy shift would occur over the remainder 2021. As a result, we think the market should price in more confidence that the RBA is unlikely to materially tighten policy before 2024. Our own forecasts reflect this view through mild underperformance on AUD crosses, namely versus NZD, CAD, or EUR. Should market pricing move toward our forecasts, our estimates suggest that AUD is poised for slightly more underperformance relative to some of its G10 peers."