SYDNEY: The Australian dollar took a step back on Wednesday after long-awaited data on wages proved softer than market bulls had bet on, quashing calls for faster rate rises and sending bond yields lower.
The Aussie peeled away to $0.6999, from an early high of $0.7046, having failed to clear resistance at $0.7055. It should find chart support around $0.6988 and $0.6870.
The New Zealand dollar followed to $0.6345, having been as high as $0.6376 overnight. A break above $0.6400 is still needed to avoid another test of the recent two-year low of $0.6219.
After months of build-up to the wages report, the actual figures were a let down. Wages rose only a modest 0.7% in the first quarter, nudging annual growth up a fraction to 2.4%.
That missed median forecasts of 2.5%, when market hawks had been hoping that a real acceleration to 2.7% or higher would push the Reserve Bank of Australia (RBA) into hiking by more than 25 basis points in June.
As a result, three-year bond yields quickly dropped 9 basis points to 2.98%. Rate futures edged up as investors priced out any chance of a 40-basis-point move to 0.75%, although a rise to 0.60% is still expected given how hot inflation was running.
“At least for the next few meetings the RBA is likely to be in ‘inflation fighting’ mode,” said Paul Bloxham, head of Australian economics at HSBC.
“At the same time, if wages growth does not get going sufficiently, a short burst of rate hikes may be followed by a pause for assessment and also potentially a shift back to a growth focus,” he added. “So we see 25bp hikes in June, July and August, and another in November to take the cash rate to 1.35%.” That is a world away from market pricing which has rates around 2.75% by year end.
That pricing could change a little on Thursday should April jobs data prove wildly outside of expectations.
Forecasts favour a solid rise of 30,000 in employment and a dip in the jobless rate to 3.9%, which would be the first reading under 4% since the early 1970s.
A drop to 3.8% or lower could revive the risk of a bigger hike in June, although most analysts see August as a more likely data following the second-quarter inflation report released in late July.