Has the RBA's interest rate cut cycle really ended? The new game of exchange rates and inflation

The recent strength of the AUD against the USD is no coincidence. On November 26, the AUD/USD rose to 0.6505, marking the fourth consecutive trading day of gains. However, behind this rebound lies a deeper turning point—the monetary policy cycle of the Reserve Bank of Australia (RBA) may be rewriting itself.

Inflation Data Breaks Silence, Rate Cut Expectations Disappear

The latest economic data has become a turning point. Australia’s October Consumer Price Index (CPI) increased by 3.8% year-over-year, surpassing the expected 3.6%. This result significantly dampened market expectations for further rate cuts by the RBA. Citi Macro analysis pointed out that the latest CPI data indicates persistent inflationary pressures, leaving limited room for the central bank to adjust policy in the short term.

More critically, if next week’s release of the National Accounts data also shows rising capacity pressures, the conclusion that the easing cycle has ended will be further confirmed. This means the entire market assumption about the RBA’s rate cut path needs to be reassessed.

At the same time, US economic data favor the Federal Reserve’s rate cut in December, further suppressing the US dollar’s relative strength, which objectively provides upward momentum for the AUD.

December Rate Decision: Holding Steady Becomes the Default

On December 9, the RBA will announce its latest interest rate decision. The market widely expects the benchmark rate to remain unchanged at 3.60%. This outcome itself signals that the RBA is shifting from easing to a wait-and-see stance.

Regarding the outlook for 2026 and beyond, opinions are sharply divided. UBS analyst Stephen Wu predicts that, amid ongoing inflation pressures above the target range, the RBA will initiate a rate hike cycle in the last three months of 2026. Barrenjoey Chief Economist Jo Masters also believes that although the threshold for raising rates is extremely high, the stubbornness of inflation faced by the RBA will likely lead it to “take action” in 2026.

The AUD Could Become a G-10 Winner

If these forecasts prove correct, the AUD will enter a new upward cycle. Francesco Pesole, an analyst at ING, stated that the AUD is expected to be the best-performing currency among the G-10 in 2026.

His core logic is: the expectation that the RBA will only cut rates once next year means the AUD interest rate will remain the highest among G-10 currencies. Coupled with a positive economic growth outlook and improved trade relations, the AUD is expected to become the highest-yielding G-10 currency by Q2 2026.

In other words, the interest rate differential will be the main driver of the next rally for the AUD. As the global rate-cut cycle gradually concludes, the attractiveness of high-yield currencies will correspondingly increase—this is a fundamental law of the traditional forex market.

Market Divergence and Investment Opportunities

Currently, market expectations for the RBA’s policy path in 2026 are quite divided, which inherently contains trading opportunities. Some institutions believe the RBA still has room to cut rates, but increasing voices point toward rate hikes or stabilization, reflecting that inflation is more stubborn than expected.

The upward trend of the AUD exchange rate is highly synchronized with these expectation shifts. Moving forward, as long as inflation or GDP data further confirm rising capacity pressures, the RBA’s policy path will become clearer, and the upward momentum for the AUD will strengthen accordingly.