RBA On Hold: Aussie Dollar Outlook Tied to Housing and Trade

What the RBA Pause Means for the Aussie

The Reserve Bank of Australia is widely expected to leave its cash rate unchanged at Tuesday's policy meeting. Markets assign a 95% probability of a hold, following three consecutive rate increases. The central bank left the door open for a pause at its last meeting, saying there was "room to pause" before assessing the impact of its tightening cycle.

The Australian dollar held steady over the past week. The greenback saw gains during the same period on a shift away from risk. China's trade data showed solid demand from Australia's largest export market. A potential deal to reopen the Strait of Hormuz, mentioned by US President Donald Trump on Thursday, could also support the currency. Australia is a net importer of refined fuels; lower crude prices would reduce capital outflows.

The RBA's domestic challenge is housing. House prices and rents continue to rise despite rate increases, driven by structural supply constraints and resilient wage growth. Normally, central bank policy directly affects mortgage costs. The RBA has struggled to cool the housing market despite those tools. That means further rate hikes remain possible regardless of external developments.

Higher Australian rates attract carry traders and capital inflows. The currency would benefit if the RBA keeps rates higher while peers ease. The main risk to the pause scenario is housing. If price pressures persist, the RBA may have to resume hiking sooner than markets expect. The next data points on wages and housing inflation will shape that decision. The RBA's statement on Tuesday will offer clues on its reaction function.