OVER the past week the Australian dollar has been setting fresh post-float highs nearly every day, reaching a peak of Au$1.0416 on Sunday. The currency’s recent rise has been driven by stronger commodity prices, improved risk appetite and the return of the carry trade. At 4.75 per cent, the Aussie remains the best yielding currency in the G20 by a very wide margin, while the recent rally in dollar-yen has revived an interest in the classic carry trade pair of Australian dollar-yen that has rallied a whopping 17 per cent since the middle of March.

Yet despite the Aussie’s recent invincibility, the rally in the pair may be due for a pause, as traders’ reconsider the prospect of any additional rate hikes from the Reserve Bank Australia (RBA). Last night, the Australian central bank issued its monthly monetary statement and the tone of the communique was decidedly dovish. The central bankers in Sydney stressed: “In the household sector, there continues to be caution in spending and borrowing.” Then adding: “Inflation is consistent with the medium-term objective of monetary policy, having declined significantly from its peak in 2008.”

The RBA’s assumption that inflation will remain within its target band of 2-3 per cent indicates that from now on the Australian central bank sees no need to hike rates any further. Clearly the policymakers in Sydney feel that the rising value of the Australian dollar is acting as a powerful offset to any inflationary pressures in the system.

Furthermore, yesterday’s surprisingly weak trade balance figures registered their first deficit in eleven months. This could signal that the rising currency is starting to create competitive pressures for the Australian export sector. The RBA appears keen to communicate that monetary policy will remain on hold for the foreseeable future.

The currency markets however continue to favour the Aussie, as sentiment towards the unit remains inordinately positive. Still, as the reality of RBA intentions begins to sink in, the pair may begin drifting towards the Au$1.0200 level. Tonight’s employment report could be a catalyst for further weakness if it misses the expectations of a 21 thousand gain in jobs.