Australian Dollar close to 6 month highs

On Friday, the Australian dollar remained close to six-month highs as markets increasingly bet on US rate cuts. Meanwhile, market activity was heavily influenced by dramatic fluctuations in the Japanese yen. The yen surged against the US dollar following an unexpectedly low US inflation report, fueling speculation about potential government intervention.

This caused the Australian Dollar to retreat to 107.55 yen, after hitting a 33-year high of 109.67 overnight. The subdued US price data also led markets to reduce the likelihood of a rate hike from the Reserve Bank of Australia.

Analysts are now pricing in only a 14% chance of an RBA hike at its August meeting, down from 40% just a couple of weeks ago. Markets continue to see little chance of a rate cut before next July, while anticipating at least two US rate cuts this year. Consequently, although Australian 10-year bond yields have dropped to a two-week low, the yield spread over US Treasuries has widened to 14 basis points, compared to -40 basis points back in April.

Much will hinge on the second-quarter consumer price report due on July 31, with expectations that inflation will edge higher.

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