BNY’s Head of Markets Macro Strategy Bob Savage notes the Australian Dollar (AUD) is entering the Reserve Bank of Australia (RBA) meeting with one of the most hawkish policy profiles in the G10, yet without a surge in inflows. AUD/USD has outperformed broader AUD aggregates, but prior cross flows have weighed on the currency. Savage highlights that confirmation of current RBA pricing could lift AUD even as Fed easing expectations are priced out.

AUD holds firm into key RBA

"AUD is heading into tomorrow’s RBA decision with one of the most aggressive policy profiles in the G10."

"Given these factors in play, we are not seeing surge flow into AUD, which is surprising given the liquidity and ratings advantages that are in place."

"AUD/USD’s current performance is surprisingly better than the AUD aggregate, and last week even saw three straight days of inflows above 1.0 in flow magnitude – the first such run this year."

"However, the intensity of AUD cross flow, especially in January, has undermined the currency’s aggregate performance relative to the pair."

"These are, however, the very positions that could struggle right against AUD, especially as Australia is one of the few economies which could benefit from a terms-of-trade shock."

"As Fed easing expectations are priced out, we wouldn’t be surprised to see AUD/USD struggle; however, if the RBA affirms current pricing while much of the G10 begins to struggle with stagflation, AUD’s aggregate averages could improve markedly."

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