Australian Dollar Nears 2-Month High

The Australian dollar held above $0.706, approaching an eight-week high as investors looked ahead to the Reserve Bank of Australia’s monetary policy decision on Tuesday. The central bank is widely expected to keep its cash rate unchanged at 4.35% for a second straight meeting, although policymakers are expected to maintain a hawkish stance as inflation remains elevated. Markets are pricing around a 50% probability of another 25-basis-point rate hike by year-end, while traders will closely watch the RBA’s updated forecasts and Governor Michele Bullock’s comments for clues on the future policy path. Elsewhere, the US dollar weakened against major currencies, after US employment unexpectedly declined in July, reducing expectations for the Federal Reserve to raise interest rates. The Aussie is also poised to climb back toward a thirty-five-year high against the yen as the impact of Tokyo’s currency intervention fades and the RBA’s hawkish stance bolsters the exchange rate.

The Australian dollar fell to around $0.70, pulling back from a seven-week high and on track to finish the week largely unchanged as renewed tensions in the Middle East dampened risk sentiment. The US dollar strengthened, while oil prices climbed following reports of Iranian attacks in the Strait of Hormuz and a lack of clarity on an agreement to reopen the crucial waterway. Higher energy prices revived inflation concerns and reinforced expectations that global interest rates could remain higher for longer. In Australia, after three rate hikes this year, markets are pricing in virtually no chance of a rate increase at the Reserve Bank's monetary policy meeting next week following softer-than-expected second-quarter inflation data. Investors are also assigning little chance of a move in September, while pricing roughly a 60% probability of a rate hike in November if third-quarter inflation proves stronger than expected.

The Australian dollar held above $0.705, staying near a seven-week high, supported by improving global risk appetite and upbeat domestic trade data. Australia’s balance on goods trade unexpectedly swung to a surplus of A$ 1.9 billion in June from a revised deficit of A$ 2.4 billion in May, as exports of gold and iron rebounded sharply, while imports flattened after a strong run. Attention now turns to the Reserve Bank of Australia’s monetary policy meeting next week, where markets are pricing in virtually no chance of a rate hike after three increases this year, but a hike in November is still about 60% priced in. Elsewhere, an agreement announced by Iran and Oman to establish a shipping corridor through the Strait of Hormuz, strengthened hopes for improved energy supplies from the Middle East. The partial reopening of the key waterway weighed on the greenback, as lower oil prices eased inflation pressures and reduced expectations for more aggressive rate hikes by the Federal Reserve.