AUD rallies in face of RBA pause

Daily Currency Update

The AUD quickly recovered its post-RBA sell-off and opens this morning higher buoyed by a weaker USD and stronger Chinese yuan. The Reserve Bank elected to leave rates on hold preferring to allow time for recent hikes to filter through the broader economy. Price action was mixed leading into the announcement as market estimates were finely balanced and only 36% pricing a hold. As such the AUD fell sharply lower following the decision giving up three-quarters of a percent and hitting intraday lows at US$0.6642. The sell-off didn't last long though with the AUD finding support and recovering losses in just a few hours. Guidance following the meeting indicates further tightening may still be required and markets have priced in a 25-basis point hike in August and a peak RBA cash rate at 4.5% suggesting two more hikes are still likely moving through the second of the year. Having pushed back toward US$0.6680 the AUD extended its recovery toward intraday highs above US$0.67, buoyed by a stronger Chinese yuan. The CNH traded at its strongest level in the last 7 days, forcing the USD back toward ¥7.23 after the People's Bank of China again set a stronger-than-anticipated reference rate. The persistent program of intervention and reports China's state banks are offering long-dated loans with interest rate relief in a bid to relieve credit crunch stresses helped bolster risk appetite and spur demand for the AUD. With the US celebrating the 4th of July the dollar extended Monday's trading lower against most majors and adding support to the AUD rebound.
Our attentions turn now to China's Caixin PMI report and the US Federal Open Market Committee meeting minutes, where the Fed paused its rate hike cycle. We expect the AUD will continue to track between US$0.66 and US$0.68.