We reckon that the AUD gains should not be surprised ever since the positive GDP flashes in last week, speculators began being concerned about a low probability to the Reserve Bank of Australia cutting its 2% official cash rate. As expected, the cash rate has remained unchanged at 1.75% in policy review meeting. 

However, having issued inflation forecasts a month ago that assumed “market pricing” (the cash rate heading down to 1.75% in due course), the RBA is likely to maintain its easing bias in the post-meeting statement, albeit with no urgency. 

August looks a better bet for a rate cut, after the Q2 CPI number has been released (July 27) and taken into account in the updated forecasts that the RBA staff will present to the Board at that meeting. 

On the contrary, AUDUSD traders await Fed Chair Yellen’s clarity on hiking cycle which has still been obscure in last night’s speech.  After signalling “on your marks” for a rate increase a week ago, she has been more circumspect on this occasion following the big jobs number miss on Friday.

Yellen highlighted downside risks to the US economic outlook: During the past month the Fed prepared the markets for an upcoming Fed hike but after the very weak jobs report for May, the market has more or less priced out a Fed hike this summer.

As a result, we could foresee AUDUSD’s upside potential to retest 0.7651 levels in the weeks to come. Elsewhere, the bears in OTC FX option market for this pair have been disappointed as you can observe IV and risk reversal nutshell. Vols have collapsed and bearish risk reversals have now become neutral.