Is the Reserve Bank of Australia about to pivot? Strong household spending exceeds expectations, can the Australian dollar continue its upward trend?

Australia’s economic fundamentals continue to improve, rewriting market expectations for the country’s monetary policy. The latest household expenditure data reveals the underlying drivers of this shift.

Domestic demand data exceeds expectations, inflationary pressures remain

In October, household spending increased by 1.3% month-on-month, far surpassing the market forecast of 0.6%; year-on-year growth also reached 5.6%, exceeding the expected 4.6%. This data sends a clear signal: Australian consumer spending remains strong, and domestic demand momentum has not waned. Correspondingly, Australia’s October Consumer Price Index (CPI) rose by 3.8% year-on-year, again exceeding expectations, indicating that inflationary pressures still exist.

Abhijit Surya, an economist at Capital Economics, commented that this expenditure data “confirms that the Reserve Bank of Australia (RBA) will not continue easing,” even hinting that the risk of policy turning has already emerged.

Market pricing reversal, rate hike expectations rise sharply

Following the data release, financial markets responded quickly. The yield on 3-year Australian government bonds immediately broke above 4%, reaching a new high since January this year. More reflective of market sentiment is the change in currency derivatives markets—the probability of a rate hike in May 2026 surged from 18% to 55% within 24 hours, demonstrating a significant shift in market mood.

This change in expectations is not unfounded. The RBA is scheduled to announce its latest interest rate decision on December 9. Although it has cut rates three times this year, given the increasing inflationary pressures, it is expected that the bank will keep rates steady at 3.6%, leaving room for future policy adjustments.

Multiple institutions optimistic about AUD appreciation

Based on assessments of Australia’s economic and policy outlook, several international financial institutions have set target exchange rates for AUD/USD:

National Australia Bank (NAB) expects AUD to reach 0.67 by December 2025 and rise to 0.71 by June 2026.

Westpac’s forecast is more aggressive, predicting the exchange rate will hit 0.69 in March 2026, rebound to 0.70 in September, and reach 0.71 by the end of the year.

ING Group offers a relatively conservative view, expecting it to rise to 0.68 in Q2 2026 and reach 0.69 by year-end.

AUD performance relative to RMB perspective

From a broader perspective, as a commodity currency, the AUD’s appreciation reflects the market’s reassessment of global risk assets. Compared to emerging market currencies like the RMB, the AUD’s relative strength among developed economies may further solidify, especially if the RBA indeed begins a rate hike cycle in 2026 as market expectations suggest.

Overall, the strong performance of household expenditure data has shifted market consensus on the RBA’s policy path. From continued easing to considering tightening, this expectation shift is driving the AUD higher. Institutions generally remain optimistic about the AUD’s performance in 2026, but whether they can achieve their target prices ultimately depends on the trajectory of Australian inflation and changes in the global economic environment.