AUD Outlook – A Goldilocks Backdrop Driving Further Upside and Cross-Rate Outperformance

Scanning the charts, we saw AUDUSD print a new YTD high of 0.6636, and those set in long positions will be keen to see a firm close above 0.6625 in the near-term. The move in AUDUSD seems largely reflective of the pricing in the USD swaps curve, but also the positive risk environment, with the S&P 500 at all-time highs, the Hang Seng at its best levels since 2021, low cross-asset volatility, and EM FX at the best levels of the year.

On the cross rates, AUDJPY has broken out above range highs of 97.12, and if that former resistance can hold as a floor, the move could extend. AUDCAD has ripped to new YTD highs, and should be well supported on intraday dips, for higher levels.

EURAUD and GBPAUD are testing major support at the July swing lows, while AUDNZD, after a modest pullback to 1.1078, has resumed its push higher. AUDCHF is testing the range highs of 0.5300.

Given the movements in AUD cross rates, it’s fair to say this is more than just tailwinds from risk markets and AUD’s use as a risk proxy in G10 FX. 

Dynamics supporting AUD appreciation: 

• Relative interest rate differentials are offering support – we see this in Aussie swaps pricing, but also in the yield differential between Australian real rates and those of the U.S. and the other G10 peers. 

• Relative growth rates support the AUD, with Q2 GDP recently coming in at 1.8% – a threshold considered its ‘potential’ growth rate. If growth is pushed above that level, it theoretically increases the inflation risk, which could suggest the 50bp of implied RBA cuts (as priced by Aussie interest rate swaps) could be reduced. Looking ahead, economists expect Australia’s GDP above 2% in each quarter through 2026. 

• Political stability adds to AUD’s appeal. Compared with the political dynamics in France, Japan, and the UK, Australia is seen as politically stable and lacks the risk premium priced into the USD, given Trump’s tariff policies and his moves targeting the Federal Reserve. 

• A relatively attractive Fiscal position: Australia’s government debt and deficit are low by global standards, with debt projected at 35.5% of GDP. While few FX shops will buy AUD on this factor alone, when France and Japan face risks of moving away from measures to address elevated deficits, Australia’s relative stability and debt position add to AUD’s attractiveness. • Commodities: Iron ore futures are trading at their best levels of the year, strengthening Australia’s relative terms of trade and offering further support for the currency. 

• EM FX strength: The JP Morgan Emerging Market FX basket is also at its best level of the year, largely driven by USDCNH testing YTD lows. A break below 7.1134 (USDCNH) would likely offer further AUD upside. 

• Bullish technicals: Price leads and defines sentiment, so the bullish breaks we’ve seen – provided they hold – would likely see momentum account chase the move higher. 

In the session ahead, AUDUSD will be driven by the U.S. core CPI print in the session ahead. A more benign inflation print could push AUDUSD towards 0.6650. That said, with U.S. rates already pricing a 7% chance of a 50bp cut, which currently seems unlikely, and U.S. Treasuries having rallied strongly of late, the risks for the USD are skewed towards a stronger rally on an upside surprise compared with the limited downside on a softer-than-expected print. 

With this USD risk profile, many traders will prefer to shift focus away from the USD and towards the FX cross rates, which puts the AUD in a favourable position for further upside and outperformance.

Good luck to all.