06.05.202611:32 Forex Analysis & Reviews: Australian dollar rides wave of positivity

The RBA on Tuesday raised the cash rate for the third consecutive time to 4.35%. Explaining the move, the central bank cited a marked acceleration in inflation in H2 2025 and noted that the Middle East conflict has further driven prices sharply higher.

Forecasts imply the RBA could hike at least two more times this year — or, with a roughly 50% probability, three more times. If those projections materialize, the official Australian rate could reach either a 15-year high of 4.6% or an 18-year high of 4.85% by the end of 2026. That is a powerful bullish factor for the AUD, provided the economy weathers tighter financial conditions and the fuel-supply threat is contained.

The Australian dollar is the only major currency that has not only stayed in a bullish trend but also managed to notch a fresh high since May 2022. Several factors explain the aussie's unusual resilience. First is a broad market expectation of de-escalation, based on the view that the US will be unable to achieve its stated goals by military means. We see excessive optimism here — failure to achieve those aims could damage US influence over the longer term, accelerate dedollarization, and ultimately undermine the petrodollar system. Trump and his team are unlikely to accept that outcome, so the current lull is probably temporary, and market hopes for a quick resolution may be unfounded. The only viable exit for the US politically would be a combined "carrot and stick" approach toward Iran, which appears unlikely to fully restore US standing.

The second reason for AUD strength is the RBA's rate hikes against a still?resilient economy. Australian GDP grew 2.6% y/y in Q4, PMI indices remain stable, and there is hope Australia can sustain growth should a real de?escalation occur. Meanwhile, the RBA is raising interest rates, yields are rising, and the economy has yet to face a direct shock — a key reason for the currency's resilience.

All of the above counts for little if Australia is hit by a fuel crisis. A prolonged conflict would make that scenario inevitable, so the AUD/USD rally stands on shaky ground and could end abruptly.

Net speculative positioning was extended: the net long in AUD increased by A$525 million during the reporting week to A$5.16 billion, but the model-derived (implied) price is trending lower.

A week ago, we expected range trading to continue and warned that if the RBA paused, the aussie would likely head south. The RBA surprised by showing resolve and supporting the currency, but the implied-price dynamics suggest any rally may be short-lived. We see an opportunity to seek reversal signals and to consider selling AUD/USD once the bullish impulse shows exhaustion — a reversal that could be triggered at any time if it becomes clear Iran is not prepared to concede and the odds of de-escalation fall.