The Reserve Bank of Australia (RBA) could set the stage for fresh policy guidance next week, potentially signaling the start of an easing cycle, though AUD gains are not guaranteed, BNY's EMEA Macro Strategist Geoff Yu reports.

Stalled productivity limits AUD strength

"Based on current pricing, the Reserve Bank of Australia (RBA) is currently one of the top G10 candidates (other than the Bank of Japan, which has always been in a different cycle) to start an easing cycle early next year. We support this view, and the RBA’s decision next week could lay the groundwork for fresh guidance in a tightening direction. Whether this translates into a stronger Australian dollar (AUD) is a different proposition."

"We continue to see the currency performing well on a variety of factors, both internal and external, while positioning is also favorable based on iFlow’s current reading. However, before initiating fresh AUD long positions against the USD or on a relative value basis, we believe there remains a risk of disappointment in the nominal exchange rate. In real terms, AUD strength is already evident through wage growth and inflation differentials."

"However, it has proven difficult to shift the adjustment burden onto the nominal exchange rate, mostly due to weak productivity growth. In absolute terms, Australian productivity has all but stalled over the past five years. The stagflationary implications have been difficult to manage, with the AUD weakening as domestic savings are recycled overseas in search of stronger real returns."