Australian Dollar: Hawkish RBA hold supports carry – BBH

Brown Brothers Harriman's Elias Haddad highlights the Australian Dollar (AUD) as one of the most appealing G10 currencies, driven by attractive carry and a hawkish Reserve Bank of Australia (RBA). The RBA is anticipated to maintain rates at 4.35% while signaling readiness for additional hikes if required, with futures pricing indicating a 50% probability of a further 25 basis points increase by the end of the year.

The Australian Dollar (AUD) and Norwegian Krone (NOK) are among the top-performing currencies in the G10 group, with NOK and AUD ranking first and second, respectively, on the G10 FX leaderboard to date. The Reserve Bank of Australia (RBA) is widely expected to retain the policy rate at 4.35% for two consecutive meetings, with the possibility of reiterating its readiness to "increase the cash rate further if needed" due to inflation surpassing 3.0%.

The RBA's August Monetary Policy Statement will provide insights into the bank's outlook on inflation and growth. The cash rate futures suggest about 50% chances of a final 25 basis points hike by year-end. The RBA has the flexibility to pause its tightening cycle, as it projects real GDP growth to fall below potential over the next two years, and the current RBA cash rate is close to the upper range of model-based estimates of the nominal neutral rate.