SYDNEY: The Australian dollar was testing four-month highs on Friday as investors piled into bets that interest rates could rise as soon as April, hammering bonds and sending yields soaring to peaks not seen since 2019.
The Aussie stood at $0.7546, having breached resistance at $0.7546 overnight to touch a top of $0.7555. It was up 1.0% for the week so far, eyeing the next technical target of $0.7616.
The New Zealand dollar was up 0.5% for the week at $0.7183 , though it again failed to clear stiff resistance at $0.7219. The bias is higher as long as support at $0.7130 holds.
Bond markets were battered anew when the Reserve Bank of Australia (RBA) skipped another chance to defend its 0.1% target for the April 2024 bond yield, even though yields had topped 0.5%.
That fed talk it would relax or even drop its yield curve control (YCC) policy at next week's board meeting next week, sending the yield flying to 0.76%.
"This is a very significant surprise," said Ben Jarman, a rate strategist at JPMorgan. "Silence is a strong signal and next week it seems the RBA will formally drop YCC entirely."
"It had already looked likely that the calendar guidance - first hike expected in 2024 - would go, as it had been tenuous for a while, so that is likely to be removed entirely too."
As a result, Jarman now expected a first hike in the 0.1% cash rate to come in the fourth quarter of next year, instead of late 2023 as previously forecasted.
Markets were even more aggressive, with futures almost fully priced for a rise to 0.25% by April, while swaps had rates above 1% by the end of the year.
Yields on three-year bonds were orbiting 1.24%, having rocketed almost 50 basis points for the week in the biggest such increase since 2001.
Three-year bond futures slid another 8 ticks to their lowest since mid-2019 at 98.590, bringing the week's loss to an eye-watering 49 ticks.
With short-term yields spiking far further than the long end, the yield curve bear-flattened markedly - the spread between three- and 10-year paper narrowed to 74 basis points from 151 basis points just a month ago.
Domestic economic data supported the hawkish turn with retail sales rebounding 1.3% in September, when analysts had looked for a 0.2% gain, while producer price figures showed house construction costs hit a record high in the third quarter.
"We doubt the RBA next week will be able to match current market pricing for early 2022, but an indication that inflation pressures may be building earlier than anticipated and that rate hikes are now likely before 2024 could be expected," said Gareth Aird, head of Australian economics at CBA.
He expects a first hike to come in November next year.
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