Synopsis:

Credit Agricole notes that AUD/USD has broken out above its 0.6350–0.6550 range, supported by USD weakness and better risk sentiment tied to US trade deal hopes. However, the durability of the rally is in question as China’s trade ties, RBA policy path, and fragile US macro conditions could still restrain AUD upside, keeping forecasts intact at 0.66 for Q3 and 0.68 by year-end.

Key Points:

• Trade Deal Hopes Provide Near-Term Lift:
  • AUD/USD strength is partly driven by optimism that the US will announce multiple trade deals post-July 4.
  • However, Credit Agricole highlights that unless deals include major import partners like China or Mexico, the broader global stagflation risk won’t fade, which would still be a drag on the AUD given China’s critical role for Australia.

• RBA Rate Cut Pricing Remains a Cap:
  • The market is nearly fully priced for a 25bp RBA cut next week, with an 80% chance of another in August, implying a terminal rate near 2.85% — firmly stimulatory.
  • Credit Agricole argues that low productivity and tight labor markets point to upside inflation risk, implying that monetary policy shouldn’t be this loose.

• Key Data Watch – Retail Sales:
  • May retail sales out Wednesday will be vital. The RBA expects a rebound in household consumption, but February’s cut only modestly boosted spending.
  • Strong retail figures could slow the pace of cuts, but soft inflation data last week means July easing still likely unless sales are surprisingly strong.

• Near-Term Technicals:
  • Clearing the top of the recent range supports near-term momentum, but Credit Agricole does not see a fundamental shift to raise targets yet.

Conclusion:

While AUD/USD’s breakout is encouraging, Credit Agricole sees limited follow-through without clear signs that the US-China trade path improves and that the RBA will hold back on deeper easing. Their base case remains 0.66 for Q3 and 0.68 into year-end, with dips and rallies driven by trade headlines and Aussie data surprises.