The Australian dollar rises for five consecutive days to reach a high. Will the December Reserve Bank decision continue the strong momentum?

Market Sentiment Heating Up

Entering the second week of December, the AUD/USD exchange rate has performed remarkably. As of December 8, AUD/USD has risen for five consecutive trading days, quoting at 0.6645, just one step away from a high not seen in over two months. Meanwhile, the yield on Australia’s 10-year government bonds continues to climb, latest at 4.737%, hitting a new high in the past two years. Behind this rally, investor attention on the upcoming December meeting of the Reserve Bank of Australia (RBA) is a key driver.

Analysis of Expectations for the December 9 RBA Meeting

Market consensus has largely aligned on the RBA’s interest rate decision on December 9 — to hold steady and keep the benchmark rate at 3.60%. This rate level is the latest stopping point after three rate cuts by the RBA this year. From 4.35% at the start of the year to 3.60% now, the easing cycle appears to have concluded. This expectation is supported by two fundamental factors: first, inflationary pressures remain; second, household consumption remains resilient, all pointing to the central bank maintaining a pause on easing policies for now.

Signals of a Hawkish Shift in the Central Bank’s Attitude

Although the market expects no rate cut in December, more attention should be paid to the potential policy signals from RBA Governor Michele Bullock. In recent public statements, Bullock emphasized that the central bank is closely monitoring inflation trends and has room to respond to the risk of inflation rebound. Richard Franulovich, head of FX strategy at Westpac Banking Corporation, believes the governor has ample reason to maintain a gradual and firm stance on inflation management.

This hawkish stance sets the stage for possible rate hikes in 2026. Shane Oliver, Chief Economist at AMP, pointed out that the RBA is likely to reaffirm its commitment to using all tools to bring inflation back to target in its statement, effectively paving the way for a rate increase next year. Several major financial institutions’ economists have begun to forecast that once Q4 inflation data is released, the RBA might start tightening monetary policy as early as February next year, though this view has also been met with some skepticism among analysts.

UBS economist George Tharenou adopts a more cautious stance, believing it is premature for the RBA to signal intentions to raise rates now. Only after several months of consistent data would such a scenario become more realistic. He expects the first actual rate hike to occur no earlier than the end of next year.

Multiple Factors Supporting the AUD Exchange Rate

The future trajectory of the AUD depends on the interaction between RBA policies and the global macro environment. Vishnu Varathan, FX strategist at Mizuho Securities, believes that if the RBA indeed adopts a hawkish stance while the Federal Reserve shifts towards a dovish stance, the AUD could benefit from exchange rate support. This is because an expanded interest rate differential would attract cross-border capital inflows.

Additionally, the AUD is supported by several structural factors. First, the role of the AUD as a hedge tool for global investors “selling off US assets” is increasingly prominent, backed by reserve asset allocation needs. Second, the revival of the commodities supercycle could continue to enhance the appeal of the AUD as a safe-haven currency. Third, the wave of AI infrastructure investments and intensified geopolitical resource competition could further boost demand for Australian exports, indirectly increasing the AUD’s value. The movement of major Asian currencies like MYR against the AUD also reflects regional currency flow trends.

Market Outlook

The next focus will be on the December 9 RBA decision announcement and subsequent commentary. If Bullock’s language clearly leans hawkish, the AUD could continue its strong momentum. Conversely, if the central bank’s wording remains vague, market reactions may become more cautious. Investors should closely monitor the decision details to adjust their positions accordingly.