AUD Under Pressure Amid High Petroleum Prices

Volkmar Baur at Commerzbank expects the Reserve Bank of Australia (RBA) to keep interest rates unchanged, in line with market pricing. However, he notes that there is scope for a slightly hawkish tone due to high petroleum prices and reduced expectations for rate hikes.

Baur points out that not a single analyst surveyed by Bloomberg expects a change in the cash target rate at tomorrow's RBA meeting, and the market has also priced in a 99% probability of no change. He argues that while this might make the meeting seem uneventful, it could still be interesting to see how central bankers interpret diverging trends in labor markets and inflation.

Baur notes that inflation has surprised on the downside twice since the last RBA meeting, but the labor market has proven surprisingly robust. He also suggests that persistently high petroleum prices will make it difficult for the RBA to sound dovish, while the market has already priced out a lot of hawkishness in recent weeks.

Baur believes there is a higher probability of a slightly hawkish surprise at tomorrow's meeting, but in the medium term, he still expects the RBA's next move will be a rate cut. Until markets fully price this outlook, the Australian Dollar (AUD) is likely to remain under pressure.