TD Securities strategists Prashant Newnaha and Alex Loo maintain a constructive stance on the Australian Dollar (AUD) despite the Reserve Bank of Australia's (RBA) close 5-4 vote. A positive terms of trade shock and increased hedging by Australian pension funds underpin AUD outperformance in G10. They see AUD/USD demand around 0.69 even if USD strength extends, while expecting AUD/CAD to correct lower on relative China versus US exposure.

AUD seen outperforming in G10 space

"Rates support may take a backseat after today's close 5-4 decision among the Board for a 25bps hike. We still retain our bias for AUD as an outperformer in the G10 space as it benefits from a positive terms of trade shock - Australia is the 3rd largest LNG producer in the world, behind Qatar and the US."

"Increased currency hedging from Australian pension funds may also anchor the AUD amidst this volatile geopolitical environment."

"If USD strength extends this week due to an escalation in the Middle East conflict, we still expect AUD/USD to find better demand around 0.69 level."

"On the crosses, we see scope for AUD/CAD to correct meaningfully lower on terms of trade impact and relative exposure to China vs US."

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