AUD holds post RBA gains as attentions turn to the Fed

Daily Currency Update

The Australian dollar consolidated a break above US$0.66 through trade on Tuesday, propelled higher after the RBA lifted rates by another 25 basis points. Having rebounded off year-to-date lows through the back half of last week the AUD recovery stalled leading into the June RBA policy update as investors vacillated between pricing a hike and a pause. The 25-point rate adjustment lifted the underlying cash rate from 3.85% to 4.1% and seemingly caught much of the market off guard. The RBA noted that stubborn near-term inflation and persistent wage growth had elevated long-run inflation risks forcing it to maintain a tightening bias. The AUD lurched upward following the decision, punching through US$0.6650 to mark intraday highs at US$0.6670. With the AUD poised to extend its recovery toward and through US$0.67, the upswing stalled as a weaker yuan spilled into AUD price action and forced investors to level out gains. Reports the People's Bank of China had asked Chinese banks to cut deposit rates in preparation for a cut to the reserve requirement ratio forced the yuan to fresh year-to-date lows versus the USD and saw the AUD track sideways through the overnight session.
Our attentions turn now to next week's Federal Reserve and the Federal Open Market Committee's latest policy update. Expectations are for policy makers to announce a pause in the tightening cycle, affording more time to assess the impact of recent rate hikes with the hope of cushioning any economic downturn. With a 75% probability of a pause priced in another Fed rate hike will catch investors and likely force the AUD off the post-RBA high. However, should the Fed opt to skip forward into July before issuing another rate hike we could see the AUD jump through US$0.67 and toward resistance at US$0.68. In the interim commentary from RBA Governor Lowe, Q4 GDP data and Chinese Trade Data will provide direction.