AUD Boosted by Hike Expectations, but Medium-Term Gains Seen Fading

Australia's currency has seen a boost due to stronger consumer price index (CPI) data and resilient household spending, which have revived expectations of another interest rate hike from the Reserve Bank of Australia (RBA). The RBA's tightening cycle appears to be ongoing, with markets pricing in an additional 25-basis-point hike by the end of 2026. This shift has helped the Australian dollar retest resistance near 0.7180-0.7200.

Despite this, OCBC FX Strategist Sim Moh Siong and Christopher Wong remain constructive on the AUD over the next one to two quarters, citing its attractive carry and the prospect of further Chinese policy stimulus as supporting factors. They note that while the RBA is likely done tightening, sticky inflation means another hike cannot be ruled out.

However, the duo expect gains to fade in the medium term as inflation continues to move towards target and the RBA gradually shifts away from a restrictive policy stance. This should eventually cap any further appreciation of the AUD.