$A slightly higher, ahead of RBA decision.

The Australian dollar has closed higher, as the market continues to speculate about a rate cut at the Reserve Bank of Australia's (RBA) October board meeting and interest rate decision.

At 1700 AEST on Tuesday, the local currency was trading at 104.26 US cents, up from 104.13 cents on Monday.

St George chief economist Hans Kunnen said the Aussie dollar had experienced a rally early in the morning, before softening slightly in the afternoon session.

"I'm not sure why it weakened, as there's been little significant data out today," he said.

"It just appears to have reached a certain point, and then softened in the afternoon."

While many investors have already priced in their expectations for the RBA's rate decision, it is still an event likely to influence the market this week.

On Tuesday, the RBA released its twice-yearly Financial Stability Report, which gave a mostly positive reading of the domestic banking sector and consumer spending habits.

"The RBA was very positive on the Australian banking system, on banking profitability and regulation, so that can't have had much negative impact on the market," Mr Kunnen said.

At 1700 on Tuesday, the Aussie dollar was at 81.10 Japanese yen, down from 81.28 yen on Monday, and 80.81 euro cents, up from 80.44 euro cents.

Meanwhile, Australian bond futures prices were higher.

At 1630 AEST on Tuesday, the December 10-year bond futures contract was trading at 96.935 (implying a yield of 3.065 per cent), up from 96.865 (3.135 per cent) on Monday.

The December three-year bond futures contract was at 97.510 (2.490 per cent), up from 97.470 (2.530 per cent).

Nomura rates strategist Martin Whetton said there was little affecting the market on Tuesday, with the RBA's stability report having little impact.

"The only thing I noted (in the Financial Stability Report) was their comments that liaising with major banks suggested that 15 per cent of borrowers were ahead by two years or more," he said.

"So they were saying that Australians are paying off mortgages at a very fast rate.

"So although there's a lot of private debt in Australia, people are able to pay their mortgages off pretty easily - and that's important news for investors."

In its report released on Tuesday morning, the RBA noted that Australia's banking system was in good shape, and could weather any potential headwinds from Europe.

Mr Whetton said the next big event for markets would be the RBA meeting and rate decision.

"I think there's generally a view that they're going to cut rates, but it could be October or November," he said.

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