AUD to USD Forecast: Will Rising Private Sector Credit Trigger an RBA Rate Shift?

Will private sector credit trend higher and force the RBA to hike rates to curb demand for credit and private consumption?

Australian Private Sector Credit and the RBA Rate Path

On Friday, June 28, Australian private sector credit figures will influence buyer appetite for the AUD/USD.

Economists forecast private sector credit to increase by 0.4% in May after rising by 0.5% in April.

Economic Activity and Inflation

Upward trends in private sector credit could signal a pickup in economic activity. Moreover, rapid credit growth could fuel inflation through increased spending and investment.

With some Australian households struggling to service existing debt, upward trends in private sector credit may also impact financial stability.

How can private sector credit trends influence the RBA rate path?

A Possible RBA Response

The RBA could respond by raising interest rates to curb demand for credit.

While the headline number requires investor consideration, the RBA could pay closer attention to housing credit trends. Economists expect housing credit to increase by 0.4% in May after rising by 0.4% in April. Housing credit makes up the largest portion of household debt in Australia.

Housing Credit and Inflation

Upward trends in housing credit could drive property prices higher and, more significantly, rents. In the recent RBA press conference, RBA Michele Bullock highlighted the effects of high rents on headline inflation.

Notably, a high rental environment may also affect household disposable incomes. Higher rents could reduce disposable income, impacting consumer spending and the Australian economy. Private consumption contributed over 50% to the Australian economy in March 2024.

Housing Market Influence and Household Sacrifices

According to realestate.com.au,

“Housing remains a key piece of the inflation puzzle with rising construction costs, labor, and rents pushing up prices – a challenge Mr Kusher said was not going away anytime soon.”

The effects of the housing market on the economy were telling. Reportedly,

“Four in five borrowers had made sacrifices to keep up with their home loan repayments over the past 12 months, with around half eating out less frequently or cutting back on entertainment, such as going to the cinema or concerts.”

The RBA Rate Path

With RBA Governor Bullock clear on RBA priorities, rate hikes to curb lending and tackle inflation are more likely than rate cuts to ease the pressure on households.

In June, the RBA held the cash rate steady at 4.35%. However, the RBA Governor spoke about Board members discussing a rate hike during deliberations, raising the threat of higher interest rates.

While housing sector credit is a consideration for the RBA, did the recent Australian Monthly CPI Indicator cement an August RBA rate hike?

Broader Economic Considerations

Beyond private sector credit, the RBA considers wage growth, consumer spending, and demand-driven inflation. Higher wages may fuel demand for private sector credit and consumer spending. Notably, higher demand for credit and the influences on inflation and the RBA rate path could drive buyer demand for the Aussie dollar.

How should the RBA respond, and should Australian households face more financial stress?

As investors consider the latest stats from Australia, the US economic calendar also warrants investor attention.

US Inflation and the Fed in the Spotlight

Later in the session on Friday, the crucial US Personal Income and Outlays report release could be pivotal for investors eyeing a September Fed rate cut.

Economists forecast the Core PCE Price Index to increase 2.6% year-on-year in May after rising 2.8% in April. Softer-than-expected numbers could fuel investor bets on a September Fed rate cut.

However, personal income and spending trends also need investor consideration. Upward trends in personal income and spending could fuel demand-driven inflation. A higher inflation outlook could mean a higher-for-longer Fed rate path to tame demand-driven inflation through higher borrowing costs.

Economists forecast personal income and spending to increase by 0.4% and 0.3%, respectively. Personal income and spending rose by 0.3% and 0.2%, respectively, in April.

With inflation in the spotlight, investors should monitor FOMC member commentary. Reactions to the Personal Income and Outlays Report and views on the timing of a Fed rate cut could move the dial.

FOMC members Thomas Barkin and Michelle Bowman are on the calendar to speak.

On Tuesday, Michelle Bowman remained open to raising interest rates if inflation didn’t improve, saying,

“I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse.”

Short-Term Forecast

Near-term AUD/USD trends will hinge on the Australian private sector credit trends and US inflation numbers. However, softer-than-expected US figures numbers could swing monetary policy divergence toward the Aussie dollar. Recent Australian inflation numbers raised investor bets on an RBA rate while the markets expect a September Fed rate cut.

AUD/USD Price Action

Daily Chart

The AUD/USD held comfortably above the 50-day and 200-day EMAs, confirming the bullish price trends.

A break above the $0.67003 resistance level could signal an AUD/USD move to the $0.67500 handle. Furthermore, a return to $0.67500 could give the bulls a run at the $0.67967 resistance level.

Australian private sector credit, US inflation, and Fed speakers require investor consideration.

Conversely, an AUD/USD drop below the 50-day EMA could give the bears a run at the 200-day EMA and the $0.65760 support level.

With a 14-period Daily RSI reading of 52.22, the AUD may return to the $0.67500 handle before entering overbought territory.