MUFG analysts highlight that the Australian Dollar has outperformed since the Middle East conflict, supported by higher energy prices and a hawkish Reserve Bank of Australia. With the RBA delivering three consecutive hikes and signalling further tightening is possible, they see improved carry appeal for AUD while benign volatility and strong global equities underpin demand for high-beta currencies.

RBA hikes enhance AUD carry

"For the RBA, this marked the third consecutive rate hike at the start of the year, lifting the policy rate to 4.35% which is the highest among G10 central banks. The RBA now assesses that policy is modestly restrictive, with the cash rate having moved above the upper bound of its estimated neutral range of 2.75%–4.25%. After delivering three consecutive hikes, the RBA has indicated that “policy is well placed” to respond to future developments."

"The updated guidance suggests that a pause is unlikely at the next meeting in June but the Australian rates market continues to expect at least one further hike by year-end. Higher yields are helping to make the AUD more attractive as a carry currency once again, and an additional hike would push the policy rate to its highest level since 2011."

"At the same time, financial conditions remain supportive for carry trades, as increased volatility in energy markets has not translated into a sustained rise in broader financial market volatility."

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