Brown Brothers Harriman expects the Reserve Bank of Australia to hold the policy rate at 4.35% at its next meeting, after three consecutive 25bp increases since February, and to stay in a data-dependent pause while assessing the impact of this year’s tightening on households and businesses. The view is framed by soft Q1 GDP, weak labour market figures and subdued sentiment, which point to sluggish underlying demand.
Market pricing is less convinced the tightening cycle is over: RBA cash rate futures indicate 60% odds of one additional 25bp rise by year end, which would take the rate to 4.60%. BBH does not share that expectation and instead points to relative rates as a guide for the currency, arguing that Australia–US 2-year yield spreads imply AUD/USD could undershoot 0.7000 in the near term. The piece was produced using an AI tool and reviewed by an editor.
Macro Backdrop And RBA Policy Outlook
With the Reserve Bank of Australia expected to keep its policy rate at 4.35% tomorrow, we see a clear opportunity for downside in the Australian dollar. Recent data supports this view, as the latest monthly CPI indicator for April moderated to 3.4% and the unemployment rate ticked up to 4.2%. This economic softness gives the RBA every reason to pause its hiking cycle.
Trading Strategy And US-Australia Yield Divergence
Given that futures markets are still pricing in a 60% chance of one more hike this year, we believe this expectation is misplaced and presents a trading opportunity. We would look to position for a weaker AUD/USD by purchasing put options with strike prices below the 0.7000 level. This strategy allows for profiting from a decline while capping potential risk.
The key driver remains the widening interest rate differential between Australia and the United States, which continues to favor the US dollar. While our central bank is pausing, recent commentary from US Federal Reserve officials suggests they are in no rush to cut rates with their own inflation pressures remaining persistent. Historically, such a divergence in central bank policy, similar to what we saw in 2014, has often led to a sustained fall in the AUD/USD exchange rate.
