- Diverging cross-currency dynamics expected
- RBA’s July meeting could be a key AUD catalyst
- Global risk sentiment and equity strength are supporting AUD
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AUD to outperform on the crosses.
The Australian Dollar is entering a critical phase amid diverging signals from domestic data, central bank expectations, and shifting global risk sentiment, say investment bank analysts.
With the July Reserve Bank of Australia (RBA) meeting approaching, currency strategists and investors are positioning for a potentially volatile period for AUD exchange rates.
Morgan Stanley flags the upcoming RBA meeting as pivotal. Market pricing currently embeds a 19bp cut, indicating a strong expectation of further easing.
However, the investment bank suggests a hold would surprise markets and likely lift the AUD, particularly on the crosses (i.e. non-USD Aussie exchange rates).
"We expect AUD to gain against USD as the broad dollar declines," Morgan Stanley noted, highlighting a divergence between market pricing, which anticipates two 25bp cuts by September, and their internal view of a more cautious RBA.
Despite a weaker-than-expected Q1 GDP, household spending has surprised slightly to the upside, introducing ambiguity into the domestic narrative. Employment and CPI figures in the coming weeks will be crucial in determining whether the RBA continues along its projected easing path or pauses to reassess.
Meanwhile, broader global dynamics are lending temporary support to the AUD.
According to MUFG, high-beta G10 commodity currencies, including the AUD, have rallied on improved global investor sentiment. Equities are surging, with the MSCI ACWI index reaching record highs amid growing optimism that trade disruption between the US and China may not escalate further.
Investor confidence has been buoyed by the delayed implementation of U.S. tariffs and a court ruling deeming some measures illegal. This shift in tone has been particularly positive for cyclical currencies, with AUD’s historical correlation to global equities amplifying its sensitivity to this environment.
China Exposure Cuts Both Ways
However, Barclays remains cautious, citing the still-elevated U.S.-China tariff regime, now nearly six times higher than pre-Trump levels, as a structural headwind.
"The recent de-escalation is beneficial for the Antipodean currencies," says Barclays, while cautioning that persistent trade barriers are likely to weigh on global growth and, by extension, commodity-linked currencies like the AUD.
Barclays also underscores a "far from rosy" domestic backdrop, referencing the "unambiguously soft" Q1 GDP and a lacklustre start to Q2 as factors that continue to justify dovish market pricing.
This contrasts with Morgan Stanley’s more constructive view, creating a complex environment for traders.
Above: AUD/USD and AUD/GBP.
Staying Weak Against European Currencies
Looking ahead, the AUD’s direction will likely hinge on the interplay between RBA policy, domestic data surprises, and broader global sentiment. While USD weakness and equity strength could lift AUD/USD, relative performance on crosses, such as EUR/AUD, may lag, particularly as European investors find stronger hedging incentives abroad.
In short, while risk appetite and a dovish Fed support the AUD, local headwinds and lingering global trade uncertainties remain formidable. Traders should brace for volatility and potential divergence across AUD pairs as the market reassesses both domestic and international narratives.