Currency markets in wait-and-see mode

The Aussie is outperforming its major peers early Tuesday after the Reserve Bank of Australia held interest rates steady at 1.5%.

This move was widely anticipated and many market participants deemed the statement as boring with no fresh signals provided on the future path of interest rates, however, the minor tweaks were enough to send AUD higher.

Governor Philip Lowe seemed to rule out the idea of pulling interest rates lower, although inflation remained well below the 2-3% target at 1.5%. The improved conditions in business and consumer confidence along with higher commodity prices are viewed as positive signs of future inflation, which indicates that the easing cycle is currently in the rear-view mirror.

The Australian dollar has been the best performing currency so far this year, up by more than 5% against the dollar, and although the RBA reiterated that an appreciating exchange would complicate the adjustment from the mining investment boom, AUDUSD still managed to gain 0.6% today.

However, I believe that any potential gains should be rather limited from current levels, especially since a series of rate hikes are expected from the Fed.

Elsewhere currencies remained stuck in narrow ranges as traders await the two major events of the week, the ECB meeting on Thursday and U.S. labor report on Friday.

While the first U.S. rate hike in 2017 looks almost certain next week, markets still require a confirmation from Friday’s NFP report.

However, I don’t expect to see any strong rally in the dollar until we receive more clarity from Trump’s administration on the fiscal side. Given that the President is still struggling to advance on his travel ban and repealing Obama Care, tax reforms and infrastructure spending will likely take more time than previously anticipated, thus, keeping any rally in the dollar limited for now.