TD Securities expects the Reserve Bank of Australia to keep policy on hold at its August meeting, leaving the cash rate unchanged at 4.35%, which matches the 4.35% consensus. The inaction is framed as consistent with a restrictive stance already in place and an economy cooling under the weight of prior tightening, with housing singled out as an area showing slower momentum while the lagged effects of earlier hikes continue to feed through.
The call also leans on inflation data, with the lower-than-expected Q2 trimmed mean Consumer Price Index giving the RBA room to pause. Market pricing is aligned with that view, as OIS implies close to 0% odds of a hike. Updated projections arrive in the August Statement of Monetary Policy, and the expectation is for only limited adjustments to inflation forecasts despite oil prices remaining elevated.
Australian Dollar Outlook And Trading Strategies
We see the Reserve Bank of Australia holding the cash rate steady at 4.35%, signaling a prolonged pause as economic activity cools. With Overnight Indexed Swaps pricing in a near-zero chance of a rate hike, the immediate upside for the Australian Dollar (AUD) is limited. Derivative traders should prepare for a range-bound market in the coming weeks.
The AUD/USD currency pair is facing strong resistance near the 0.6650 level as the interest rate gap with global peers narrows. We recommend selling out-of-the-money call options on the Aussie dollar to collect premium while volatility remains low. Historical data shows that during previous RBA pause cycles, the currency’s realized volatility dropped by an average of 15%.
Bond Yields, Yield Curve Strategies, And Equity Hedging
In the fixed-income space, Australian three-year government bond yields have stabilized near 3.75%, signaling that the worst of the tightening cycle is behind us. We suggest utilizing interest rate swaps to position for a steeper yield curve as growth concerns mount. This strategy will help capture yield spreads before the central bank eventually pivots toward rate cuts.
Additionally, Australia’s recent GDP growth of just 1.1% and a cooling housing market indicate that restrictive policy is taking a toll. Traders should hedge their portfolios by purchasing put options on Australian bank equities, which are vulnerable to slowing credit growth. This protects against a potential rise in bad loans over the next quarter.
