Rabobank’s Senior FX Strategist Jane Foley highlights that the Australian Dollar (AUD) is the best performing G10 currency year-to-date, supported by expectations of further Reserve Bank of Australia tightening. The bank notes firm Australian labour data and a relatively hawkish Reserve Bank of Australia (RBA) stance. Rabobank’s central view is for AUD/USD to trade higher towards the 0.72 region by year-end, with further downside expected in EUR/AUD.

RBA expectations underpin Australian Dollar strength

"After the February rate hike, the market had initially expected the RBA to pause for breath, but the inflationary implications of the Middle East war appeared to trigger concerns at the RBA about the anchoring of inflation expectations. Broadly speaking, higher bond yields throughout the G10 in recent weeks will have helped to keep inflation expectations anchored and done some of the heavy lifting on behalf of the central banks by tightening monetary conditions. For the RBA, however, significant questions remain as to whether this is enough."

"This morning the release of March Australian labour data brought a slightly softer than expected 17.9K increase in employment. That said, the breakdown shows there was a very healthy 52.5K rise in full-time jobs, with part time jobs decreasing. This provides evidence of a robust labour market which carries with it more risks related to sticky inflation potential."

"Despite this, the market remains fully priced for another 25 bp RBA rate hike on a three-month view, encouraged by another round of firm Australian labour data. Our central view remains that AUD/USD will be trading higher at the end of this year in the 0.72 region. Near-term we favour buying the AUD vs. the EUR."

"For now, the relatively hawkish position of the RBA is keeping the AUD well supported. While the USD continues to be driven by sentiment based around the war in the Middle East suggesting it could be susceptible to large swings, we expect further downside in EUR/AUD back towards the March low around 1.6130."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)