Australian Dollar: AI vulnerability and RBA limits – MUFG

Derek Halpenny, Head of Research at MUFG, argues the Australian Dollar’s (AUD) earlier support from pre-emptive Reserve Bank of Australia (RBA) tightening is fading as markets see limited scope for further hikes while repricing additional Fed moves.

Australian Dollar exposed to AI shock

"The pre-emptive nature of monetary tightening in Australia has benefitted the Australian dollar but time appears to have run out for providing support for the currency as investor conclude that RBA is running out of scope for additional rate hikes at a time when investors are reappraising their views on additional Fed rate hikes. "

"The RBA vote when it hiked this month (6-3) underlined the growing opposition to hikes and RBA Governor Bullock signalled a pause to assess given some of the tightening will not have hit the real economy."

"We view AUD as probably the most vulnerable currency in a sharp AI-related sell-off. It has a relatively high macroeconomic exposure, it also has energy and commodity exposures that would result in a negative terms of trade hit and AUD is high-beta and hence would underperform in a scenario of tightening financial conditions and a rise in financial market volatility."

"In the recent 6-day period of AI selling through to 5th November, AUD was the worst performing G10 currency. Despite the AUD sell-off from the most recent high in September, AUD is still the 2nd best performing G10 currency on a year-to-date basis. If the AI sell-off intensifies again, AUD remains more vulnerable than other G10 currencies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)