Australia dollar off 10-month top, market bets the farm on June rate hike

SYDNEY: The Australian dollar found broad support on Wednesday as the market narrowed the odds on a local rate hike as soon as June, but got dragged from 10-month peaks by an even more hawkish outlook for US monetary policy.

The Aussie was resting at $0.7581, having reached as high as $0.7661 overnight. That leaves $0.7660 as resistance along with $0.7715, while support lies at $0.7575 and $0.7535.

The kiwi dollar was back at $0.6948, having briefly reached a five-month top at $0.7034 overnight. Support lies around $0.6935 and the 200-day moving average of $0.6910.

The pullback came after US Federal Reserve Governor Lael Brainard flagged a rapid runoff in the central bank’s balance sheet to add to rapid hikes in interest rates.

The aggressive outlook offset a hawkish turn by the Reserve Bank of Australia (RBA) which on Tuesday dropped a pledge to be patient on policy amid accelerating inflation.

RBA Deputy Governor Michele Bullock appears before the Senate later Wednesday and could expand on the language change.

The shift sent local banks scrambling to bring forward the timing of a first rate hike, with ANZ now tipping a move to 0.25% in June rather than September.

It also sees quarter-point moves in July, August and November to take the cash rate to 1.0% by year end.

Bill Evans, chief economist at Westpac, was also surprised by the RBA’s sudden mood swing.

“There has been a major change in the rhetoric and the Board has now increased its flexibility to start raising rates as early as June, two months earlier than our current call which remains August,” he said.

Markets have long been wagering on a move in June and, indeed, are pricing in some risk the RBA could hike all the way to 0.5% in one go. Futures have rates at 1.90% by Christmas and 3.0% by the middle of 2023.

Yields on three-year bonds shot to their highest since late 2014 at 2.56%, further shrinking the gap to 10-year yields to just 38 basis points.

Another notable move has been a surge in the Aussie to five-year peaks on the euro as talk of more sanctions on Russia saw the single currency slide 1.1% to A$1.4380.