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AUD/USD posts strongest weekly gain since 2025

AUD/USD closed last week higher at 0.6896, posting a robust 3.19% weekly gain – its strongest since the 4.14% rally from the Liberation Day low of 0.5912 in early April 2025.

Last week’s gains were fuelled by exceptionally strong December employment data, which lifted market-implied odds of a Reserve Bank of Australia (RBA) rate hike at next week’s board meeting to around 60%.

Further tailwinds came from buoyant global risk sentiment, surging commodity prices, and a broader US dollar (USD) pullback following recent geopolitical drama regarding Greenland. The latter has potentially encouraged increased foreign hedging of US assets due to reduced confidence in the current US administration.

Super funds eyeing hedging shifts

Locally, the subject of foreign exchange (FX) hedging by Australian super funds has gained attention following reports that Australian Retirement Trust (ART), the nation’s second-largest fund (managing approximately A$353 billion), is considering higher FX hedging ratios on its offshore holdings.

Traditionally, super funds hedge only 20% – 30% of their approximately A$4.4 trillion to A$4.5 trillion in assets, roughly half of which is invested overseas. This low ratio provides a natural cushion; during periods of risk aversion, the Australian dollar (AUD) traditionally falls, helping to offset portfolio losses on foreign assets.

If Australian super funds do lift their FX hedges, it would reduce that cushioning effect – hence the caution. However, if more funds follow suit, it could deliver meaningful additional support for the high-flying AUD/USD.

Looking ahead, AUD/USD’s near-term trajectory will hinge on evolving geopolitical headlines – which appear to be flowing freely at this point – as well as tomorrow’s fourth quarter (Q4) inflation report.

Q4 CPI

Date: Wednesday, 28 January at 11.30am AEDT

In the third quarter (Q3) 2025, headline consumer price index (CPI) rose by 1.3%, accelerating from the 0.7% increase in the second quarter (Q2). This pushed the annual headline inflation rate higher to 3.2%, up from 2.1% in Q2 – the lowest since March 2021 – marking the highest quarterly rise since March 2023, largely driven by housing (electricity +9.0% due to price reviews and rebate timing), recreation/culture, and transport.

The RBA preferred measure, the trimmed mean, increased to 3.0% year-on-year (YoY), up from 2.7% in Q2. This represented the first rise in annual trimmed mean inflation since December 2022, signalling a reversal of the prior downward trend.

Since the Q3 CPI release, inflation has continued to show upside pressures. The transition to complete monthly CPI data revealed headline inflation peaking at 3.8% in October before easing to 3.4% in November, while the trimmed mean edged up to 3.3% in October before dipping slightly to 3.2% in November.

These firmer prints prompted hawkish RBA commentary and a shift towards expectations of RBA rate hikes in 2026, further reinforced by last week’s unexpectedly strong labour force report for December.

Expectations for Q4

The Q4 CPI is expected to show headline inflation rising by 0.6%, lifting the annual rate to 3.6%. The core measure, the trimmed mean, is expected to rise by 0.8% quarter-on-quarter (QoQ) for an annual rate of 3.2%, in line with the RBA’s forecast.

Implications for the RBA

A downside surprise of 0.7% in the trimmed mean would potentially open the door for the RBA to remain on hold at its meeting next week.

Conversely, a trimmed mean quarterly print of 0.9% or higher would likely see a 25 basis point (bp) rate hike at next week’s meeting.

Ahead of the Q4 inflation report, the Australian interest rate market is pricing in a 60% chance of a 25 bp rate hike at next week’s meeting. Looking further out, a full 25 bp hike is priced in by May, with a cumulative 50 bp of tightening priced in for 2026.

AU all groups CPI and trimmed mean chart