The Australian and New Zealand dollars started the week on the back foot, slipping against the US dollar as currency traders turned their attention to the Reserve Bank of Australia's (RBA) policy meeting on Tuesday. The central bank is widely expected to keep its cash rate at 4.35%, but the tone of its statement could still move markets.
The Aussie had been on a multi-week winning streak, helped by a softer US dollar. That followed a weaker-than-expected US jobs report, which led traders to scale back their expectations for near-term rate increases from the Federal Reserve. With the US dollar losing some of its appeal, the Australian dollar had been a beneficiary. But now, the focus is shifting back to domestic policy.
What to expect from the RBA
Economists surveyed by Reuters expect the RBA to hold its cash rate at 4.35% for the seventh consecutive meeting. The central bank has been in a holding pattern since late last year, trying to balance sticky inflation against a slowing economy. While the rate is likely to stay unchanged, the accompanying statement could offer clues about the future path.
If the RBA sounds more hawkish than expected—signaling that it's still worried about inflation and might need to raise rates again—that could boost the Aussie, as higher rates tend to attract foreign capital. Conversely, a more dovish tone, hinting at possible rate cuts, could weigh on the currency.
The RBA's dilemma is not unique. Central banks around the world are grappling with how long to keep borrowing costs elevated. In the US, the July jobs report is expected to show a modest payroll gain, which could influence the Fed's next move. Meanwhile, the Bank of Japan is also in focus, with officials' speeches setting the stage for a possible September hike.
Why the currency moves matter
For everyday investors, currency fluctuations might seem like a distant concern, but they can have real implications. A weaker Aussie makes imported goods more expensive, which can feed into inflation. It also affects the returns on international investments. If you hold US stocks or funds, a falling Aussie can boost your returns when converted back to local currency.
On the other hand, a stronger Aussie can be a headwind for Australian exporters, as their goods become pricier overseas. Companies in sectors like mining and agriculture, which rely heavily on exports, are particularly sensitive to currency swings.
The kiwi dollar, which often moves in tandem with the Aussie due to close trade ties, also slipped. The New Zealand economy has its own challenges, but the currency pair tends to track similar trends.
What investors should watch next
The immediate catalyst is Tuesday's RBA decision. Beyond that, traders will be watching for any hints about the timing of potential rate cuts. Markets are currently pricing in a hold for the rest of the year, but a hawkish surprise could change that calculus.
Also on the radar are upcoming US inflation data, which could influence the Fed's policy path. As noted in our oil market update, traders are also keeping an eye on geopolitical risks that could affect energy prices and, by extension, inflation.
For now, the RBA's message will be key. If it signals that it's not done fighting inflation, the Aussie could regain some strength. If it hints at easing, the currency could extend its decline. Either way, the decision will have ripple effects across currency markets and beyond.
As always, it's important to remember that currency movements are just one piece of the investment puzzle. A diversified portfolio can help cushion against volatility in any single asset class.
