Australian Dollar Holds Near 3-Month Top

The Australian dollar held above $0.71, trading near its highest level in more than three months as strong economic growth strengthened the odds of an imminent rate hike, while investors weighed the latest trade figures. The country’s goods trade surplus narrowed to A$1.9 billion in July from a revised A$2.3 billion in June, but remained above expectations of A$1.45 billion, as weaker gold exports and fuel imports drove the decline. Meanwhile, recent data showed the economy held up better than expected in the second quarter, reinforcing expectations that the Reserve Bank of Australia could resume tightening after raising rates three times this year. Markets increased the odds of a hike this month to 58% from 49% before the GDP release, while a move to 4.60% is fully priced for November. The hawkish policy outlook also came as renewed fighting in the Gulf pushed oil prices higher and raised concerns over inflation.

The Australian dollar steadied around $0.71, holding recent losses as investors assessed stronger-than-expected GDP data that strengthened the case for another interest rate hike. The economy expanded 0.4% quarter-on-quarter in Q2, beating forecasts for 0.3% growth, while annual growth accelerated to 2.1%, above expectations for 1.8%. The stronger reading suggested economic activity remains resilient despite the Reserve Bank's efforts to cool demand and curb persistent inflation. Markets raised the odds of a fourth rate hike at the September meeting to 57% from 48% previously after the GDP release, while a November hike is now more than fully priced in. The probability of another hike in Q1 2027 also rose to 82% from 62%. Meanwhile, concerns over potential oil supply disruptions amid the escalating US-Iran conflict have pushed energy prices higher, adding to inflation pressures. However, a stronger US dollar capped the Aussie as rising yields boosted demand for safe-haven currencies.

The Australian dollar hovered below $0.72, holding near its highest level since early June as a global bond selloff kept investors cautious. Rising concerns over US budget deficits and debt levels pushed Treasury yields higher, while Australian markets faced pressure from expectations that interest rates may need to stay elevated for longer to curb inflation. Markets now see a 54% chance of a 25-basis-point RBA rate hike to 4.60% on September 29, up from just 10% a week earlier, while the probability of another increase to 4.85% stands at 40%. Rate-hike expectations strengthened even as recent data pointed to weaker economic momentum, with net exports and government spending suggesting the economy slowed in the second quarter. Investors now await the Q2 GDP report due Wednesday, with economists expecting growth of just 0.3% quarter-on-quarter and annual growth to ease to 1.8% from 2.5%. Still, core inflation remains high at 3.6%, keeping pressure on the RBA to hike rates again.