Australian Dollar: Upside capped versus USD as positioning stretches – MUFG

MUFG analysts argue that the Australian Dollar’s strong run versus the US Dollar is losing momentum. They highlight limited further upside for AUD/USD as global risk appetite cools, China slows and Reserve Bank of Australia (RBA) policy takes a backseat to rising US yields. Record-long AUD positioning and yield spreads now point to growing downside risks for the pair.

AUD strength seen near exhaustion

"The Australian dollar remains the second best performing G10 currency since the US-Iran conflict began at the end of February and price action and macro developments certainly suggest to us that the upside for AUD/USD from here is limited and the risks are now starting to skew more to the downside."

"The prospects of a peace deal have increased significantly over the weekend and that may well see the AUD/USD rate move further higher from here as optimism picks up and some of the current pricing of a rate hike by the Fed is reversed."

"We expect financial market participants to be more responsive to news and/or data suggesting the RBA has time to assess the policy stance."

"The 2-year yield in the US hit a new high on Friday, closing at 4.12%, a 25bp move higher just in May to date and the highest level since February 2025."

"The daily correlation between AUD/USD and the AU-US 2-year spread has strengthened sharply and an extension of higher rates in the US as the RBA takes a backseat is going to increasingly weigh on AUD/USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)