Australian dollar on defensive as RBA rejects rate hike babble

SYDNEY: The Australian dollar was fighting to keep a rally alive on Wednesday after a top central banker bluntly rebuffed market chatter about early rate increases, helping pull local yields lower.

The Aussie faded to $0.7684, having just survived another brush with support around $0.7620 overnight. It needs to clear $0.7727 resistance to find firmer footing, while a break of the February low at $0.7565 would signal a deeper correction.

The New Zealand dollar dipped to $0.7150, and looked in danger of again testing support at $0.7105. Resistance lies at $0.7195, with more up at $0.7270.

The Aussie took a knock when Reserve Bank of Australia (RBA) Governor Philip Lowe pushed back strongly on market chatter of a rate hike as early as next year, reiterating that a move was unlikely until 2024 at the earliest.

He also said the recent rise in bond yields was good news if it meant the market was starting to believe policy would be successful in delivering higher wages and inflation.

"The underlying tone of this speech was unambiguously dovish," said Su-Lin Ong, head of Australian and New Zealand fixed income strategy at RBC Capital Markets.

"In particular, the discussion around maximum employment, challenges to wage growth and achieving sustained within-target inflation reinforces the likelihood of a prolonged period of low rates and even more QE beyond the current two programs," Ong added.

That was a relief to the bond market for the short term, though if the RBA were ultimately successful in driving inflation higher it would likely put upward pressure on longer-term yields.

For now, yields on 10-year notes eased 6 basis points to 1.73% and away from last week's high of 1.87%.

Three-year bond futures edged up 2 ticks to 99.752, though the implied yield of 0.248% remains well above the RBA's target of 0.1%. The March contract expires next week and the roll over could create some volatility given a recent lack of liquidity in the market.

Across the Tasman, the Reserve Bank of New Zealand (RBNZ) also remains committed to low rates, but took a small step away from emergency settings on Wednesday by ending some loan schemes for banks.

Ten-year yields have eased to 1.83%, from their recent peak of 2.048%, but are still up 82 basis points for the year so far.