Best Performing G10 Currency In May


The ‘Aussie’ is broadly higher again on Monday, following on from a 2% rally last week.

This is both an oversold bounce and a reaction to the RBA’s surprise hike last week.

But how long can it continue? Markets are sceptical the RBA will remain hawkish.

Markets in the UK are closed on Monday for an extra bank holiday to mark the coronation of King Charles III, which has led to a quiet session in Europe. Forex markets are open but are lacking volatility and EURGBP is completely flat.

There is a small amount of US dollar weakness following on from last week’s strong employment numbers, with EURUSD and GBPUSD making slight gains of +0.25%, but the largest moves have come in Asia overnight with AUDUSD and NZDUSUD making solid gains of +0.6% and +0.75|% respectively. This comes after the RBA surprised markets last week with a hawkish stance and a 25bps hike. The RBNZ is also expected to stay hawkish for some time which will keep the ‘Kiwi’ bid.

Australian Dollar Rebound Underway

The Australian Dollar has consistently underperformed in 2023, mostly due to the dovish leaning RBA who looked to have finished their hiking cycle at the relatively low cash rate of 3.6%. However, last week’s meeting surprised markets with a 25bps hike to 3.85%, a move that was given only a 10% probability ahead of the meeting. Markets are now evaluating if there will be further rate hikes to come and the Australian Dollar has climbed steadily higher. Last week saw it close higher each session and rally an impressive 2% which took it to the of the performance table among G10 currencies in May (so far).

Much of the rebound in the ‘Aussie’ has been partly due to its oversold condition. It has been dropping even against a very weak US dollar, and other G7 pairs like EURAUD have been trending consistently higher. Indeed, EURAUD recently climbed to exchange rates last seen at the October 2020 highs and was looking very overbought. It has now dropped more than 3% from the April high as the Aussie rebounded.

Australian Dollar strength has continued early this week, but the issue now is how much further can it go? The surprise 25bps hike has now surely been priced in, as has some expectation for further tightening, but will the RBA follow through? Opinions are mixed.


Another Hike?

“The RBA’s tone indicates that another hike could be delivered at any near term meeting,” write Westpac.

That said, Westpac don’t believe they will deliver:

“Westpac expects the RBA to maintain a tightening bias until at least the August meeting but with a baseline view that the cash rate remains at 3.85% until Q1 2024.”

It’s a view that seems to be shared with the broader markets and one that echoes the US, where the Fed say they are not considering rate cuts, but the market is pricing them in regardless.

“Money markets quickly adjusted to the RBA surprise but price little risk of another hike this year, instead leaning towards the chance of a Q4 rate cut,” continued Westpac on Monday.

The diverging views could lead to currency volatility later this year. Since the cuts are already mostly priced in, the risk is to an upside surprise where the RBA keeps rates high or even raises again, sending the Australian Dollar considerably higher.

Last week’s meeting minutes are due out on Tuesday and may provide more insights into why the RBA thought it necessary to surprise the markets and hike. However, it isn’t likely to provide any firm signals for future policy moves, and even if it did, the market is sceptical of the bank’s communication after being surprised three times in this hiking cycle.