ING’s Francesco Pesole says weak Australian labour data and grim PMIs support a cautious Reserve Bank of Australia (RBA) stance and dampen expectations for further tightening. However, he maintains a constructive view on AUD/USD, citing attractive fundamentals and carry, greater downside risks for US yields, and a summer target of 0.73 assuming a US-Iran agreement is reached.

RBA likely to pause but AUD fundamentals still strong

"A poor jobs report in Australia overnight hit the overbought AUD. Unemployment rose to 4.5% as employment dropped 18.6k in April, with a larger share of full-time job losses. PMIs were also pretty grim, with the composite gauge falling from 50.4 to 47.8, well into contraction levels."

"All this endorses the cautious stance of the Reserve Bank of Australia after the May rate hike and has poured cold water on still-hawkish expectations for year-end. Our call remains for no more hikes in Australia, with markets still having one fully priced in by November."

"But our more dovish view on the RBA does not translate into a less bullish view on AUD/USD. We see even greater downside risks for USD front-end yields, and AUD’s overall fundamentals and carry story remain highly attractive."

"Its high-beta nature makes corrections like the current one inevitable, but we retain a rather strong conviction on further AUD/USD gains into year-end, assuming a Middle East agreement is ultimately reached. Our summer target remains 0.73."

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