- The RBA has adopted a less aggressive approach to monetary policy.
- The interest rate swaps market now indicates an increased likelihood of the RBA implementing its first interest rate cut in February 2025.
- The yield spreads between Australian government bonds and US Treasuries for the 2-year and 10-year have continued to narrow.
- There is an increasing risk of AUD/USD experiencing a significant bearish breakdown beneath the 0.6360 level.
This analysis builds on our previous report “AUD/USD: The “Trump Trade” overshadows a cautiously hawkish RBA, posing risks for further declines”, published on November 8, 2024. Click here for a recap.
Since our last report, the price movements have declined as anticipated, reaching the major support zone between 0.6400 and 0.6360 as indicated. The Australian dollar has underperformed among major currencies, losing -2.70% against the US dollar based on a one-month rolling basis as of December 13.
RBA Shifts to a More Dovish Stance 
Figure 1: Trends in 2-year and 10-year yield spreads of Australian sovereign bonds versus US Treasuries as of December 13, 2024 (Source: TradingView)
During its latest monetary policy meeting on December 10, 2024, the RBA held the cash rate steady at 4.35% for the ninth consecutive meeting. However, Governor Bullock’s recent comments have shown a noticeably less hawkish tone than in previous press conferences.
In her remarks, she noted a decrease in inflationary pressures in Australia and acknowledged the ongoing weaknesses in the private sector of the economy. These observations align with a dovish shift reflected in the RBA’s latest monetary statement, which indicated that “some of the upside risks to inflation appear to have eased.”
The interest rate swaps market now assigns approximately a 70% chance that the RBA will initiate its first interest rate cut in early Q1 of next year, specifically in February. The RBA stands as the only major developed central bank yet to cut interest rates, aside from the Bank of Japan, which remains an anomaly.
Moreover, the yield spreads between Australian government bonds and US Treasuries have continued to contract, currently at -0.28% and -0.03%, respectively (see Figure 1). This trend suggests that Australia’s fixed-income market is becoming less appealing compared to US fixed-income securities, which could indirectly exert longer-term downward pressure on the AUD/USD exchange rate.
Bearish Momentum Persists
Figure 2: Medium-term and significant trends for AUD/USD as of December 13, 2024 (Source: TradingView)
The AUD/USD pair continues to trade within a medium-term descending channel since its retest of the long-term downward trendline resistance originating from the February 2021 swing high on September 30, 2024.
It has broken below a significant ascending trendline that formed from the October 13, 2023 swing low and is currently testing key support at 0.6360 (previous swing lows from October 26, 2023, April 19, 2024, and August 5, 2024).
The daily RSI momentum indicator remains in bearish territory, indicating that further weakness in the AUD/USD price action is likely.
A critical medium-term resistance level at 0.6560 (also the 50-day moving average) remains significant; a daily close below 0.6360 could initiate an impulsive downward movement over the coming weeks or months, with potential support levels at 0.6200 and 0.6130.
Conversely, a breakout above 0.6560 would negate the current bearish outlook, potentially leading to a retracement towards the next medium-term resistance levels at 0.6690 and 0.6810.
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