The Australian Dollar traded above 0.71, its highest level since February 2023. Markets priced about a 70% chance of a further 25 bp Reserve Bank of Australia (RBA) rate rise in May.
RBA Deputy Governor Andrew Hauser said inflation is too high and policymakers are prepared to act to contain it. He also said the central bank should not criticise government spending decisions, and that public and private demand should be treated the same when assessing inflation.
Rba Signals Inflation Focus
Hauser said rates were raised in February because global growth was stronger than expected, financial conditions were less restrictive than assumed, and private demand increased relative to supply. He also said keeping the economy close to balance may have made Australia more sensitive to demand shocks, with questions raised about inflation risk as price pressures return.
Housing finance data showed first-home-buyer loan commitments rose 6.8% quarter-on-quarter to 31,783 in the December quarter. This was the largest rise since the equivalent quarter of 2023, and the year-on-year increase was 9.1%.
The value of first-home-buyer loans increased 15.5% quarter-on-quarter. The average first-home-buyer loan size rose 8.5% to a record $607,624, largely driven by New South Wales.
We are seeing a familiar pattern re-emerge, reminding us of the dynamics from early 2025. At that time, the Reserve Bank of Australia took a surprisingly hawkish turn, pushing the Aussie dollar higher on the back of persistent inflation concerns. That period was also marked by a surge in housing loan commitments, which underscored strong domestic demand.
Markets Reprice Rate Path
This old dynamic is relevant again because the latest CPI reading for January 2026 came in at 3.8%, stubbornly above the RBA’s target and higher than markets anticipated. Just like last year, this sticky inflation is forcing policymakers to maintain a hawkish stance despite a series of hikes in 2025. The underlying strength in the domestic economy, particularly in services, seems to be a persistent inflationary force.
The market is now reacting to this reality, with overnight index swaps pricing in a 45% probability of another RBA rate hike in March, up from just 20% two weeks ago. This repricing suggests that traders who had anticipated rate cuts this year are being caught off guard. For derivative traders, this indicates that long positions on the Australian dollar may be favorable.
Considering this outlook, buying AUD/USD call options with expirations in late March or April could be a prudent strategy to capitalize on a potential hawkish surprise from the RBA. Implied volatility for the pair has risen to a three-month high of 9.2%, reflecting the growing uncertainty and potential for sharp movements. This environment favors option strategies that benefit from both a directional move and an increase in volatility.
The housing market continues to underpin this inflationary pressure, much like it did in late 2024 and early 2025. Data from January 2026 showed national home prices rising 0.6% month-over-month, resisting the impact of higher interest rates. This resilience suggests household balance sheets are strong, giving the RBA less reason to pause its fight against inflation.
This contrasts with the situation in the United States, where recent inflation figures have shown a more consistent path toward the Federal Reserve’s 2% goal. This policy divergence, with the RBA remaining hawkish while the Fed stays on hold, creates a fundamental tailwind for AUD/USD. We see this reflected in the widening yield spread between Australian and U.S. 2-year government bonds, which has moved in the Aussie’s favor by 15 basis points this month.
