Aussie Near Four-Week High Before RBA as Fed Rate Rise Odds Drop

  • Swaps indicate 7% chance RBA will cut interest rate Tuesday
  • ‘The Fed outlook offers a reprieve for Aussie,’ Callow says

Australia’s dollar held near a four-week high versus its U.S. peer amid signs central banks in both country’s won’t rush to change policy.

Swaps indicate only about 10 percent odds that the Reserve Bank of Australia will lower interest rates at its meeting Tuesday, following a cut last month. The Aussie rallied the most in three months against the dollar last week after a U.S. Labor Department report showed employers in May added the fewest number of workers in almost six years. Federal Reserve Chair Janet Yellen maintained Monday that additional gradual rate increases are appropriate, without specifying their precise timing.

“The Fed outlook offers a reprieve for Aussie against the U.S. dollar,” said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp. in Sydney. “Assuming the RBA holds steady today and doesn’t sound too dovish, then Aussie should make a run at 74.50 U.S. cents this week.”

The Australian dollar was little changed at 73.72 U.S. cents as of 11:17 a.m. in Tokyo, after reaching 73.91 Monday, the strongest level since May 11. The greenback was at $1.1352 per euro from $1.1355. It was little changed at 107.58 yen.

Less Clarity

Yellen was less specific than in her previous remarks in describing when she expected the Fed to raise rates again. On May 27 at Harvard University, she said an increase would likely be appropriate in “coming months,” a phrase omitted from Monday’s speech text. The central bank raised its target for the federal funds rate by 0.25 percentage point in December, the first increase since 2006.

Futures indicate a 2 percent chance the Fed will raise interest rates by its June 14-15 meeting, down from 30 percent odds at the start of last week.

The RBA unexpectedly lowered its key rate to a record 1.75 percent on May 3, citing a lower outlook for inflation. That helped push the Aussie on a downward path to its lowest level in almost three months on May 24. A better-than-expected reading for gross domestic product at the start of June helped spur a 1.9 percent rebound in the Aussie this month.

Citigroup Inc. entered a long position in Australia’s dollar versus the greenback, according to a note to institutional investors that suggested market positioning has become too bearish. Hedge funds and other large speculators swung to a net short position last week for the first time since the five days ended Feb. 9, according to the latest figures from the Commodity Futures Trading Commission.

“The market looks vulnerable to AUD strength on surprising hawkishness,” Todd Elmer, a Singapore-based foreign-exchange strategist at the bank, wrote in the note. “Domestic data flow has been firm.”

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