Australian Dollar Holds Gains Amid Budget, Ukraine War. Will RBA Push AUD/USD Higher?

March 30, 2022

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AUSTRALIAN DOLLAR, AUD/USD, UKRAINE, BUDGET, ELECTION, RBA – TALKING POINTS

The Australian Dollar could be at an inflection point post-budget
The RBA might be set for a May lift-off if CPI delivers upside surprise
Ukraine war an outlier for the Aussie. Can AUD/USD break higher?

Australian Dollar Budget: The Australian Dollar has been hovering around 75 cents for a week now, as geopolitical and fundamental drivers are unable to give clear direction.

The geopolitical landscape emanating out of the Ukraine war has added to positive investor sentiment in equities today, with Russia saying that they are open to negotiation for de-escalation.

Many observers are sceptical that this is a ploy by Putin to stall for time to re-position his military.

In any case, the development has not raised risk appetite in currency land.

On the fundamental side, the Australian government delivered their pre-election budget overnight, and there were few surprises.

The key points are:

A small temporary tax break for low and middle-income earners
Atemporary cut in the fuel excise taxes that equates to roughly a 10% reduction at the bowser
An increase in defence spending, particularly for cyber security
Infrastructure spending on roads, dams and airports
Some measures for first home buyers were also thrown in, but they are unlikely to have much impact.
Higher commodity prices improved the bottom line
A budget that is going to remain in deficit for the foreseeable future but is a low percentage of GDP compared to other G-20 nations.
AAA country credit rating intact

Overall, it has been perceived by the market as benignly positive, with the Australian Dollar showing little reaction. The implications of the budget might be felt down the track with the RBA’s interpretation of its’ possible impact on inflation.

The RBA could be mindful of the upcoming election, although this has not stopped them from moving rates in the past. Australians will be going to the polls before May 21st with the last day for the government to call the election being April 19th.

This brings into play the May RBA meeting for possible rate movement. The first quarter CPI report will be released 27th April and the central bank has previously said that they will wait for this data before hiking.

The market seems to be favouring June as the likely date for rate movement, but there have been significant price rises in many sectors year to date. The CPI number could be an uncomfortable outcome for an inflation-targeting central bank.

The take-out for the Australian Dollar is that the backdrop remains positive but that the good news could already be in the price for now. Without a move above the October 2021 high of 0.7556, the Aussie may have seen a short-term peak. A break above there could suggest that bullish momentum persists.