The optimism around the Aussie Dollar (AUD) remains unabated, always underpinned by the cautious/hawkish stance from the RBA, all leaving the door open to extra gains in AUD/USD in the short-term horizon.
Indeed, AUD/USD surpassed the 0.7100 barrier for the first time since February 2023 as investors assessed the latest speech from Deputy Governor Andrew Hauser. He said that inflation was still running too high and that the economy was operating close to capacity limits, reinforcing market speculation that further policy tightening could still be on the table.
The move higher in spot also comes amid decent gains in the US Dollar (USD), which claws back some momentum after the US Nonfarm Payrolls showed the economy added more jobs that initially estimated in the first month of the year (130K).
Australia, easing gently, not rolling over
Recent Australian data have hardly been spectacular, but they do reinforce a reassuring narrative. The economy is cooling, yes, but it is doing so in a measured and orderly fashion. Momentum has softened rather than collapsed, keeping the soft landing story alive.
January Purchasing Managers’ Index (PMI) surveys fit neatly into that picture. Both Manufacturing and Services improved and remained in expansion territory, printing at 52.3 and 56.3 respectively. Retail Sales are holding up reasonably well, and the trade surplus widened to A$3.373 billion in December.
Growth, meanwhile, is moderating only gradually: Gross Domestic Product (GDP) rose by 0.4% QoQ in Q3, while annual growth printed at 2.1%, exactly in line with the Reserve Bank of Australia (RBA) forecasts.
The labour market continues to stand out. Employment Change surged by 65.2K in December, and the Unemployment Rate unexpectedly dipped to 4.1% from 4.3%, once again beating expectations.
Inflation remains the more complicated part of the story after the December Consumer Price Index (CPI) data surprised to the upside, with headline inflation rising to 3.8% YoY from 3.4%. The trimmed mean climbed to 3.3%, in line with consensus but slightly above the RBA’s 3.2% projection. On a quarterly basis, trimmed mean inflation increased to 3.4% over the year to Q4.
One area that really stands out is housing credit, as Home Loans jumped by 10.6% QoQ in Q4 2025, the fastest pace since March 2021, while Investment Lending for Homes climbed by 7.9%. In plain terms, money is still flowing quite freely into the property market. That doesn’t exactly scream “tight conditions”, and, if anything, it strengthens the case for the RBA to keep a firm grip on policy rather than ease off too soon.
China, supportive… but not a game changer
China is still offering the Aussie a decent underlying cushion. The backdrop is broadly constructive, and that helps. But it is not the kind of powerful, synchronised upswing that typically drives a sustained AUD rally. For now, it feels more like quiet support in the background than a true catalyst for the next big leg higher.
The economy expanded at an annualised pace of 4.5% in Q4, with quarterly growth at 1.2%. Retail Sales rose by 0.9% YoY in December, solid enough, but far from eye-catching.
More recent indicators, however, point to renewed softness. The National Bureau of Statistics (NBS) Manufacturing PMI and Non-Manufacturing PMI both slipped back into contraction territory in January, at 49.3 and 49.4 respectively.
The Caixin surveys were somewhat more encouraging. Manufacturing edged up to 50.3, just above the expansion threshold, while Services improved to 52.3.
Trade was a clearer positive. The surplus widened sharply to $114.1 billion in December, supported by a near 7% rise in exports and a solid 5.7% increase in imports.
Regarding inflation, signals remain mixed after January consumer prices rose by 0.2% from a year earlier, while Producer Prices contracted by 1.4% YoY, underlining that deflationary pressures have not fully faded.
For now, the People’s Bank of China (PBoC) is proceeding cautiously. Loan Prime Rates (LPR) were left unchanged in January at 3.00% for the one year and 3.50% for the five years, reinforcing the view that policy support will remain gradual rather than aggressive.
RBA, leaning hawkish, but not in a hurry
The RBA raised its Official Cash Rate (OCR) to 3.85% in a move that carried a clear hawkish tilt and broadly matched expectations. Upgraded growth and inflation forecasts suggest firmer momentum in activity and price pressures that are becoming more widespread. Core inflation is now expected to remain above the 2 to 3% target band for much of the forecast horizon, strengthening the case for keeping policy restrictive.
According to officials’ views, inflation is now being driven more by demand than by temporary or external factors, highlighting stronger-than-expected private demand as a key reason to keep policy tight, even though productivity growth is still underwhelming.
Governor Bullock was careful to present the move as a recalibration rather than the beginning of a new hiking cycle. Still, reading between the lines, it was clear the Board is uneasy about the steady upward drift in inflation and is not prepared to take chances.
For markets, that implies rates are likely to stay restrictive for longer, limiting the scope for near term easing. From an FX perspective, that offers moderate support to the Aussie, particularly against low yielding peers, even if the RBA’s emphasis on full employment caps the probability of a more aggressive tightening phase.
Markets are currently pencilling in just over 38 basis points of additional tightening this year.
Positioning, optimism building
Positioning data suggest that optimism around the Aussie is creeping back. According to the Commodity Futures Trading Commission (CFTC), non commercial traders increased their net long exposure to around 26.1K contracts in the week to February 3, levels last seen in late November 2024.
Open interest has risen for a third consecutive week, reaching roughly 254.2K contracts, signalling that fresh money is entering the market rather than existing positions simply being rolled.
What matters next
Near term: Incoming US data, tariff headlines and geopolitical developments are likely to dominate the USD side of the equation. At home, the labour market and inflation prints remain the key swing factors for the RBA outlook.
Risks: AUD remains highly sensitive to global risk sentiment. A sudden or sharp deterioration in risk appetite trends, renewed concerns around China, or a sustainable rebound in the Greenback could all quickly unwind recent gains.
Technical landscape
The 55-day Simple Moving Average (SMA) rises above the 100- and 200-day readings, marking a bullish alignment. All three SMAs trend higher while price holds above them. The 55-day SMA at 0.6753 offers nearby dynamic support. The Relative Strength Index (14) prints 70.13 (overbought), which could cap immediate extension even as momentum remains firm.
Trend strength remains elevated, with the Average Directional Index (14) around 49.64, reinforcing buyer control. A consolidation above the rising 55-day average would keep the broader advance intact. A deeper pullback would expose the 100-day SMA at 0.6652 before the 200-day at 0.6583.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line
AUD/USD remains tightly linked to global risk sentiment and China’s growth outlook. A sustained break above the 0.7000 handle would transform the current constructive bias into a more convincing bullish signal.
For now, a softer USD, steady if unspectacular domestic data, a clearly hawkish RBA and a broadly supportive, if uninspiring, China backdrop keep the balance of risks tilted towards further upside rather than a meaningful reversal.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
