The Australian dollar is unexpectedly becoming a safe haven in the market. The currency is gaining support as energy prices remain high and investors increase bets that the Reserve Bank of Australia could raise interest rates as early as next week.
On Tuesday, the Australian dollar rose against the U.S. dollar to its highest level since June 2022 and reached a more than 35-year peak against the Japanese yen, making it the best-performing major currency so far this year. The upward trend continued on Wednesday, with the AUD/USD pair climbing 0.8% to 0.7175 at one point. Citigroup noted that while the Australian dollar is typically sensitive to the U.S. dollar and overall risk sentiment, this rally may persist, potentially pushing the exchange rate to 75 U.S. cents within the next three months.
As traders and economists further raise expectations for the Reserve Bank of Australia to hike rates in order to curb inflation, the Australian dollar may remain relatively resilient amid expanding market volatility. Additionally, if oil and gas prices stay elevated, Australia's status as a major energy exporter could continue to support the currency.
"In the current environment, the Australian dollar is a better option compared to other currencies," said Nick Twidale, Chief Market Analyst at AT Global Markets in Sydney. However, he also pointed out that this trend "goes against the traditional direction we usually see during periods of rising geopolitical risk. Typically, under such circumstances, the Australian dollar weakens against most currencies, with the most pronounced decline being against the yen."
Officials from the Reserve Bank of Australia have previously stated that they would not hesitate to raise policy rates if conflicts in the Middle East further intensify inflationary pressures. Their hawkish remarks have also provided support for the Australian dollar.
Interest rate swaps indicate that the market now sees a more than 70% probability of a rate hike by the central bank on March 17. This has helped keep Australian bond yields among the highest in developed markets. Bets on rate increases pushed the yield spread between Australian and U.S. benchmark government bonds to its widest level since October 2022 on Tuesday, further bolstering the Australian dollar's strength.
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