TD Securities’ Global Strategy Team says Australia’s 2026/27 Budget is slightly stimulatory, with looser fiscal settings and Treasury forecasts that are more upbeat than the RBA’s. The Budget papers show an underlying cash balance improvement of A$45b over the forward estimates.
The headline deficit is forecast to widen from 1.6% of GDP in 2025/26 to 2.1% in 2026/27. The headline cash deficit is projected to worsen versus the underlying position by about A$6.4b compared with prior estimates.
Fiscal Outlook And Rba Implications
TD Securities says conservative commodity assumptions could allow smaller deficits than projected. They add that if Treasury’s outlook is closer to outcomes than the RBA’s, the RBA may need to deliver more policy tightening.
Australia’s Q1 wages rose 0.8% q/q (cons: 0.8%, TD: 0.8%), with annual wages at 3.3% y/y. The outcome matched the RBA’s May SoMP forecast and was linked to limited market reaction.
The note says wage growth remains contained despite a tight labour market and inflation pressures. It also references the RBA view that higher short-term inflation expectations could feed into wage bargaining over the next year, as workers seek to maintain real wages.
The government’s new budget is slightly expansionary, which works against the Reserve Bank of Australia’s goal of taming inflation. With the latest monthly CPI figure for April surprising to the upside at 3.8%, the central bank is being pushed into a corner. This environment suggests we should be looking at strategies that benefit from a stronger Australian dollar.
Aud Positioning And Options Strategy
We see a clear difference between the government’s upbeat economic forecasts and the RBA’s more cautious view. This reminds us of the situation in mid-2025, when markets prematurely priced in rate cuts before persistent inflation forced the RBA’s hand. If the Treasury’s rosier outlook proves correct, the RBA will likely be forced to tighten policy more than is currently priced in.
While the latest quarterly wage growth of 0.8% was in line with expectations, it does not tell the whole story. The labour market remains tight, with the unemployment rate holding at a low 3.9% in April. This gives workers significant bargaining power to demand higher pay to offset rising living costs, a key risk the RBA is monitoring.
Given this outlook, we believe option pricing may not fully reflect the risk of a hawkish surprise from the RBA in the coming months. Buying near-term AUD/USD call options or selling out-of-the-money put options offers a favorable risk-reward profile to position for potential currency strength. The increased uncertainty also suggests that implied volatility could rise, making long volatility positions attractive.
We are also considering the potential for the AUD to outperform against currencies where central banks are less hawkish, such as the US dollar. As the Federal Reserve signals a potential pause, the widening interest rate differential could favor the Aussie dollar. Therefore, positions that are long AUD/USD could be particularly effective over the next several weeks.
