MUFG: The AUD - FJElite

The Australian dollar has weakened modestly overnight after failing to break back above the 0.7100-level yesterday. The Australin dollar had weakened in the run up to last night's RBA policy meeting driven in part by paring back of expectations for further RBA rate hikes. After raising rates in February, March and May the RBA unanimously decided to leave rates on hold overnight for the first time this year at 4.35%.

In the updated policy statement, the RBA acknowledged that financial conditions have tightening this year in responses to the three rate hikes which is having a dampening impact on activity. The RBA highlighted that “there are signs that growth in consumer spending is slowing as expected and momentum in the housing market has shifted, with house prices falling in some capital cities". At the same time, the unemployment rate was higher than expected in April. Evidence of slower growth have been encouraging market participants to scale back expectations for further RBA rate hikes.

However, the RBA did not rule out that further hikes maybe required given that headline and underlying inflation judged to be "still too high”. Inflation pass-through from higher oil prices is adding to the high inflation recorded at the start of the year that was reflected capacity pressures in the economy. The RBA wants demand growth to slow to reduce capacity pressures and remains prepared to tighten further if required.

Overall, today’s policy update indicates that the RBA is currently comfortable to leave rates on hold in the near-erm while it continues to assess the economic impact of the three hikes it delivered so far this year. The US-lran deal and ongoing decline in energy prices will help to ease pressure on the RBA to hikes rates further this year. The recent paring of RBA rate hike expectations and correction lower for commodity prices are currently contributing to the Australin dollar giving back some of the strong gains recorded earlier this year. The commodity currencies of the Australian dollar and Norwegian krone are still by far the best performing G10 currencies this year.