AUD jumps back above 0.66 as markets eye a pause in Fed tightening cycle

Daily Currency Update

The Australian dollar crept higher through trade on Monday, buoyed by increasing expectations the Fed will opt to push back further rate hikes when it meets this week. Having broken below US$0.65, the AUD clawed its way back toward US$0.66, leading into the close last week and looked to consolidate a break above this level through Monday.

After Friday’s mixed US non-farm payroll update, within which payroll data trended lower, our attention turned to ISM service data. An unexpected fall back toward December levels, as new orders and employment subcomponents trended lower, surprised investors. The downturn in employment data points to slower jobs growth and a continued correction in wages. While still uncomfortably high for the Fed, a trend of softer wages will be welcomed and markets are now pricing just a 25% chance of a Fed rate adjustment.

Having pushed toward US$0.6620, our focus turns to the RBA and its policy statement. After last week’s stubbornly high inflation update, we anticipate policymakers will issue another 25-point hike and promise further tightening through the months ahead. While it is clear the cost-of-living crisis and elevated interest rates are hurting large swathes of the domestic economy, persistent inflation and sustained consumer spending will likely force the RBA to lift rates twice, if not three more times through Q3.

Elevated yield expectations may help add a floor underneath the AUD, yet the RBA remains at a significant yield disadvantage when compared with other major central banks.