AUD: election underway very soon
The announcement will be timed to steal media attention away from opposition leader, Peter Dutton’s, budget reply later.
The election spending promises have been ramped up by both sides of politics with the ALP announcing about AUD40bn in promises, which the NLP has matched. Dutton’s reply to the budget later today is not likely to change this pattern. While he has pledged to repeal the modest income taxes announced by the government on Tuesday, he said he would put the money towards a temporary halving of the fuel excise levy.
We continue to see growing risks of an Australian sovereign ratings downgrade as neither side of politics is interested in fiscal discipline. As the de facto election campaign has picked up pace, the Australian yield curve has steepened. While the RBA’s mid-February rate cut could be blamed for this steepening, it was a hawkish cut and since then the market has been pretty consistent with its pricing of the terminal RBA cash rate a little below 3.50%. Fiscal indiscipline on the part of the Federal government and opposition hold substantial blame for the steepening.
This steepening has been positive for AUD/USD as it has also led to a rise in the Australian-US box yield spread. In the medium term, however, a sovereign ratings downgrade would contain significant sticker shock for the AUD. The AUD’s downside from a sovereign downgrade would be limited by the fact that Australia’s sovereign balance sheet and rating, even a notch lower than AAA, would still look favourable in comparison to other G10 sovereigns.
NOK: another Norges turnaround?
For months, the Norges Bank has telegraphed that the start of its easing cycle would most likely start in March. Yet, a massive overshoot in domestic inflation this year, coupled with a solid Regional Survey this quarter, have led markets to seriously question whether the Norges Bank could in the end skip the easing cycle altogether, with only about a 30% chance of a rate cut being priced-in at today’s meeting. Recent history would also not rule out such a last-minute turnaround, as we recall that back in March 2023 the bank was supposed to conclude its tightening cycle at 3.00% but ultimately went to raise rates all the way to 4.50% later that year.
The NOK is therefore set for a swift adjustment to the immediate rate decision, but we doubt that the outcome could produce more durable changes. The key is that a more hawkish turn by the Norges Bank than in the past couple of meetings should be enough to keep the NOK among the highest yielder of the G10 FX space in the year ahead. That could help the still undervalued NOK to increasingly recoup some ground, while Norway’s outlook faces a high degree of uncertainty too, rather regarding global energy supply than tariff though. After breaking away from a well-established range-trading pattern within 11.60/12.00, EUR/NOK has recently slipped below our long-held Q125e forecast of 11.40, with
