Australian Dollar Recovers as US Yields Near Peak

The Australian Dollar (AUD) is showing signs of recovery against the US Dollar (USD), but its strength remains tied to US interest rate movements. Standard Chartered argues that further hikes by the Reserve Bank of Australia (RBA) are not necessary for the AUD to strengthen. The bank believes that Australia's existing yield advantage will support the AUD/USD exchange rate once investors are convinced that US rates are nearing their peak.

As of Tuesday, the AUD/USD pair traded near US$0.6978, up 0.16% after previous gains of 0.14% on Monday and 0.40% on Friday. However, this recovery has only reversed a small portion of the 3.15% decline seen in September. Standard Chartered maintains a bullish outlook for the AUD over the next six to twelve months, contingent on the timing of a peak in the US Dollar.

Standard Chartered expects the RBA to keep interest rates unchanged, despite concerns about inflation. The bank notes that Australia's cash rate of 4.60% is already 60-85 basis points above the Federal Reserve's range of 3.75-4.00%. Even with two additional Fed hikes, Australian rates would still hold a modest advantage. This view contrasts with Westpac's forecast, which anticipates another RBA hike in November.

Recent weak US hiring data, with payrolls rising by just 29,000 in September and annual wage growth slowing to 3.0%, supports the argument for a Fed pause. However, Standard Chartered emphasizes that inflation data for September to November will determine whether the Fed moves in December. The AUD's recovery could be threatened by persistently high US yields, weaker China growth, or a deterioration in global risk sentiment.