AUD May Face Headwinds as RBA Extends Pause

The Australian Dollar may face headwinds due to an extended pause in interest rate hikes by the Reserve Bank of Australia (RBA), according to Brown Brothers Harriman's (BBH) Elias Haddad. The RBA has been focusing on measures of underlying inflation, such as trimmed mean CPI, which is expected to rise to a two-year high at 3.7% y/y in Q2.

Haddad views the risk as skewed towards a more extended pause in the RBA tightening cycle, citing sub-potential growth and a cash rate near the top of neutral estimates as headwinds for the AUD. The RBA's projected real GDP growth to be below potential over the next two years also supports this view.

The upcoming speeches by RBA Governor Michele Bullock and Assistant Governor Sarah Hunter may provide some policy guidance ahead of the next RBA decision on August 11. Currently, RBA cash rate futures price-in 30% odds of a 25bps hike in August and fully price one to 4.60% by year end.