Monthly Wrap: AUD – Australian dollar fluctuates as hawkish RBA inspires mixed responses from investors

By Philip McHugh on July 28, 2022

Key takeaways:

• Australian dollar fluctuates following RBA’s larger-than-expected rate hike.
• Mixed market sentiment also infused volatility into AUD exchange rates.
• AUD Monthly lows: £0.56, $0.66, €0.64, NZ$1.09, C$0.87
• AUD Monthly highs: £0.58, $0.69, €0.68, NZ$1.11, C$0.89

Trade in the Australian dollar was mixed at the end of June, printing higher against some currencies while sinking against others. Upbeat comments from Reserve Bank of Australia (RBA) Governor Philip Lowe may have been responsible for inspiring upside in the ‘Aussie’.

Elsewhere, news that China would be easing its restrictive Covid-19 policies could have lent further support. Toward the end of the month, neither Beijing nor Shanghai reported any new local infections for the first time since late February.

At the start of July, AUD dropped despite a better-than-expected manufacturing release and impressive Chinese PMI data. This was widely attributed to a fall in risk sentiment.

When the RBA raised interest rates on 5 July, the ‘Aussie’ initially stumbled pressured by fears of a recession.

AUD subsequently rose, however, buoyed by a record-high trade surplus. May’s data was thought to have been driven by sales of coal and iron.

Throughout the remainder of the month, the currency has been alternately subdued by weakening confidence data, a new surge of Chinese Covid-19 cases and risk-off trading sentiment.

Conversely, the ‘Aussie’ enjoyed intermittent tailwinds on China’s positive trade balance, upbeat AU employment data and hawkish comments from RBA policymakers, leading the currency to end the month broadly higher.

Looking ahead, rising inflationary pressures may inspire volatility in AUD exchange rates, encouraging aggressive policy tightening measures from the RBA while exacerbating fears of a recession.

The RBA’s rate decision on 2 August could stoke volatility depending on how aggressively the bank opts to raise rates.

Meanwhile, June’s trade balance is expected to reveal a fall in the country’s surplus, applying potential headwinds. Later in the month, AU employment data may encourage bullish sentiment if the labour market is tight.