Image © RBA.

The Australian Dollar could be set to remain an underperformer as the Reserve Bank of Australia (RBA) looks committed to a 'dovish' policy path that investors believe will see it cut interest rates in the second half of the year.

The Australian Dollar lagged behind its major peers for a second day running after RBA Governor Philip Lowe said inflation was now coming down due in part to the RBA's earlier tightening of monetary policy.

Speaking to the National Press Club Lowe said the prospect of further rate hikes was not guaranteed:

"Before we take our next interest rate decision in Perth in early May, we will conduct a full review of the forecasts and scenarios for the economy and inflation."

"AUD suffered as the comments from RBA's Lowe that the recent pause may be a pause for more than just one meeting and that they could very well be done hiking helped to weigh on the currency," says W. Brad Bechtel, Global Head of FX at Jefferies LLC.

The Pound to Australian Dollar exchange rate jumped 1.20% on April 04 after the RBA opted to maintain interest rate settings at 3.5%.

A further gain of 0.40% followed on April 05 in the wake of Lowe's comments, with the pair advancing yet further to 1.86 on April 06.

"The AUD remains incredibly frustrating," says Kit Juckes, Head of FX Research at Société Générale. "Relative rate expectations (and yields) have not really moved significantly in its favour."

The Australian-U.S. Dollar exchange rate has meanwhile fallen by more than a per cent over the past three days to 0.6696.

Money market pricing shows investors are now positioned for at least 25 basis points of cuts by the end of the year with only the U.S. and Canada priced for greater cuts.

This ensures Australian bond yields underperform relative to where central banks are to raise interest rates further, in turn weighing on AUD.

Bechtel says Lowe "did try to reinforce the message that they are not going to be cutting rates any time soon, but the market continues to look through that sort of messaging from central bankers."

Looking ahead, it appears the biggest driver for currency markets will be the degree to which various central banks are expected to cut rates over the coming months.

In this regard, the cuts priced into the RBA are a potential downforce on the Aussie Dollar.

Analysts at Goldman Sachs point out that Lowe said the decision to pause in April "does not imply that interest rate increases are over” and reiterated that the Board still "expects" that further hikes "may well be needed."

"Governor Lowe noted that the flow of data from month to month

would determine if and when rates move higher, highlighting that another ‘on hold’ decision in May would not rule out hikes later in the year," says analyst Andrew Boak at Goldman Sachs.

Goldman Sachs says it maintains a base case for the RBA to remain on hold in the near term before hiking in July (+25bp) and August (+25bp) to a terminal rate of 4.1%.

This could come as a surprise to a market poised for rate cuts later in the year, potentially prompting a sharp rebound in the Australian Dollar.

Upcoming data releases will therefore be of greater interest to currency markets than has been the case for some time.