Aussie Set for Heavy Monthly Drop

The Australian dollar held around $0.686 on Tuesday, trading near a two-month low and on track for a roughly 3.6% decline in March, marking the worst monthly performance since December 2024. The Aussie held up for much of the month due to higher interest rates, but has started to crack in recent sessions as market concerns shift from inflation to global growth. Minutes from the Reserve Bank of Australia’s March meeting also signaled uncertainty on the future path for interest rates after two rate hikes this year, due to concerns over the Middle East war. The board acknowledged the need to balance the material bearing of a longer conflict on both inflation and economic activity. Markets currently imply a 60% chance of another rate hike in May, with around 65 bps of additional tightening this year. First-quarter inflation data, labor market figures, and monthly consumer spending indicators are still due in April before the next policy meeting, all set to guide the RBA’s next move.

The Australian dollar weakened further to around $0.685, down for a seventh straight session to hit its lowest since January 23 as a sharp rise in energy prices amid ongoing Middle East tensions clouded the global economic outlook and pushed investors toward the safety of the US dollar. The Aussie also fell 2.1% last week, its worst weekly performance since April 2025, and on track for a roughly 3.8% monthly decline, the steepest since December 2024. Oil prices continued to climb as the conflict in Iran entered its fifth week, with renewed attacks in the region increasing risks to global energy supply. In response, Australia's Prime Minister Anthony Albanese announced a temporary cut to fuel taxes to help ease cost pressures, underscoring the broader impact of rising energy prices on the economy. Focus now turns to the release of the RBA’s latest meeting minutes after a narrow vote to lift rates to 4.1%, as policymakers balance persistent inflation against a softening growth outlook.

The Australian dollar weakened to around $0.685, hitting a more than two-month low as fears of a prolonged energy shock from the Middle East war clouded the global growth outlook and dampened demand for commodities. Support from relatively higher Australian interest rates is starting to fade, as markets increasingly expect further tightening across other major economies, narrowing the yield advantage. At the same time, a steep rise in petrol prices is expected to feed into domestic inflation while also squeezing household spending. Economists warn inflation could accelerate further, with headline CPI potentially rising toward 4.5% soon and even approaching 5% in Q2 if energy costs remain elevated. Earlier, RBA Assistant Governor Christopher Kent had already cautioned that a prolonged Gulf conflict could weigh on growth, even as they remain focused on keeping inflation expectations anchored. Markets currently imply a 68% chance of a May hike and see rates reaching 4.75% by year-end.