Australian Dollar edges higher as softer US Dollar, hawkish RBA offer support
- AUD/USD edges higher as a pullback in US Treasury yields weighs on the US Dollar.
- Hawkish RBA meeting minutes reinforce expectations of further monetary policy tightening.
- Traders await Wednesday’s US CPI report for fresh clues on the Fed’s interest rate outlook.
AUD/USD edges higher on Tuesday as a pullback in US Treasury yields weighs on the US Dollar (USD), pulling it away from recent highs. Meanwhile, hawkish signals from the Reserve Bank of Australia (RBA) provide underlying support to the Australian Dollar (AUD). At the time of writing, the pair trades around 0.6982, up 0.33% on the day.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.25 after reaching 102.61 on Monday, its highest since April 2025. Meanwhile, the benchmark 10-year US Treasury yield slips below 5.20%, retreating from last week’s peak of 5.36%, its highest since 2002.
Yields ease as Oil prices decline modestly, while a sell-off in AI-related stocks encourages demand for government bonds. Short covering following the recent bond sell-off also contributes to the retreat in yields.
However, Oil prices remain elevated as the US-Iran stalemate keeps Middle East supply risks in focus. Higher energy costs add to global inflation pressures, reinforcing expectations of tighter monetary policy. Traders widely expect another Federal Reserve (Fed) interest rate hike before year-end, which could limit further declines in the US Dollar and Treasury yields.
Attention now turns to the US Consumer Price Index (CPI) report, due on Wednesday, which could reshape expectations for the Fed’s October 27-28 meeting. According to the CME FedWatch Tool, markets expect the central bank to leave interest rates unchanged this month, while pricing in an approximately 85% probability of a rate hike in December.
RBA focus on inflation sharpens as weaker Aussie and global rates loom large
On the Australian side, the RBA’s September meeting minutes, released on Tuesday, confirmed a unanimous decision to raise the cash rate by 25 basis points to 4.60%. Policymakers highlighted the need to act promptly to keep inflation expectations anchored.
Analysts at Commerzbank note that the minutes released early this morning “make clear just how strongly the RBA’s focus has shifted towards inflation,” with the central bank increasingly preoccupied by mounting price pressures. According to the bank, the RBA is worried about inflation “for several reasons,” starting with “global developments over which it has no control but to which it nevertheless has to respond.”
From a currency standpoint, Commerzbank highlights that “another argument was particularly interesting from an FX perspective,” as the RBA “expressed concern that a weaker AUD could contribute to elevated price pressures through imported inflation.” In the same context, the minutes pointed out that “a rise in the global neutral interest rate could cause the AUD to depreciate if Australia’s neutral rate had not increased by a similar amount,” although Commerzbank notes that “the RBA appeared to assume that it had.”
Looking ahead, Commerzbank argues that “three factors are therefore likely to be crucial for the RBA,” with the first being “what other central banks do.” The bank cautions that “if they raise rates more aggressively than expected, the RBA could feel compelled to tighten further as well to prevent an excessive depreciation of the AUD.”
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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