Front-end Australian yields look most exposed to next week’s decision, with roughly 5bp of hike pricing still to close if the RBA moves. A hold would likely hit the Australian dollar hard, given how much of its October strength rests on rate expectations. Oil is a key driver: further gains in crude would add to fuel-led inflation and reinforce the tightening bias, while a sustained pullback could ease pressure on the RBA. The Fed’s stance remains the main external constraint on AUD/USD.
—
Earlier:
RBA set for fifth 2026 hike to 4.85% as banks flag risk of another move in February
—
ING likes the Aussie’s yield and expects the RBA to add to it next week, but sees the Fed standing between AUD/USD and 0.72.
Summary:
ING raised its short-term AUD/USD target to 0.71, but doesn’t expect a return to 0.72 this quarter
It says the Australian dollar offers the best volatility-adjusted short-term carry in G10
ING expects a 25bp RBA hike on 3 November, taking the cash rate to 4.85%, against about 20bp priced
Headline CPI hit 4.3% y/y in September, driven almost entirely by fuel-related transport costs
Goods and services inflation are both above 4%, and core inflation accelerated
A hawkish Fed is expected to keep supporting the US dollar, limiting AUD gains
ING has raised its short-term forecast for the Australian dollar to 0.71 against the US dollar, citing the currency’s strong October and its attractive yield advantage. The bank does not expect AUD/USD to climb back to 0.72 this quarter, however, as a hawkish Federal Reserve keeps supporting the greenback.
The upgrade rests on ING’s view that the Reserve Bank of Australia will raise its cash rate by 25 basis points at its 3 November meeting, rather than waiting until December. That would lift the cash rate to 4.85%. The bank had previously pencilled in a hike at some point in the fourth quarter, and now sees the latest inflation data as strong enough to bring the move forward. Markets are pricing around 20 basis points of tightening for next week, slightly short of a full hike.
ING said AUD/USD is driven mainly by short-term interest rate differentials. It added that the Australian dollar currently offers the best short-term carry in the G10 once volatility is taken into account. Carry refers to the return investors earn from holding a higher-yielding currency, and a further RBA hike would widen that advantage.
The inflation backdrop supports the case. Headline consumer prices rose 4.3% from a year earlier in September, with inflation picking up by about 90 basis points between July and September, based on the latest monthly figures and the third-quarter report. Almost all of that increase came from transport costs, largely reflecting higher fuel prices. ING noted that goods and services inflation are both now running above 4%, a sign that energy costs are spreading more widely through the economy. Core inflation also accelerated on both annual and quarterly measures. The trimmed mean rose to 3.7%, above forecasts and well above the RBA’s target band.
ING concluded that underlying inflation is not on a sustained downward path, weakening any argument for a pause. At its last meeting, the RBA raised rates unanimously and signalled it was prepared to accept some softening in the labour market to bring inflation back to target.
The main limit on further Australian dollar gains lies outside Australia. With the Fed also leaning hawkish, ING expects the US dollar to remain supported, capping the upside for AUD/USD in the near term even if the RBA delivers next week.
—
RBA rate hike expected Tuesday next week:
This article was written by Eamonn Sheridan at investinglive.com.
