SYDNEY: The Australian dollar scaled a seven-year peak on the low-yielding Japanese yen on Wednesday as markets priced in a more hawkish outlook for domestic interest rates.
The Aussie stretched as high as 96.19 yen, bringing gains for the past two weeks to a hefty 5.7%.
It also struck a four-year top on the kiwi at NZ$1.1160. The Aussie was a touch softer on the US dollar at $.7204, having again shied away from the 200-day moving average of $0.7257.
The New Zealand dollar eased to $0.6458, after touching a two-week trough of $0.6423 overnight.
The latest gains came after the Reserve Bank of Australia’s (RBA) aggressive half-point rate hike to 0.85% led markets to brace for a faster pace of tightening.
Futures imply another 50 basis points to 1.35% in July, with rates reaching 2% by September and 3% by year end. Most economists are not quite as hawkish, but do note the RBA Board has radically changed its tune on inflation.
Aussie jumps after RBA hikes more than expected; yen sinks to new 20-year low
“We interpret that to mean the Board now wants to shift the cash rate closer to neutral as soon as possible,” said Alan Oster, group chief economist at NAB.
“Governor (Philip) Lowe has previously indicated a view that the neutral rate should be around 2.50%.” As a result, he now expects half-point hikes in July and August and rates at 2.1% by year end.
“Such a significant adjustment to rates will substantially affect the economy heading into 2023,” Oster added, and looks for only two quarter-point increases next year.
The bond market is also signalling that faster hikes in the near term will likely restrain inflation next year, with the yield curve flattening markedly.
The spread between three-year and 10-year yields has more than halved in the past six months to reach 32 basis points, the smallest since just before the pandemic hit in early 2020.
“Tighter financial conditions as the RBA shifts to neutral rapidly, and maybe beyond, and growth headwinds should prompt markets to lower their terminal rate expectations,” said Ashish Agrawal, an analyst at Barclays.
That could keep three-year yields around the current 3.25% and help them ease to 3.0% in the first quarter of 2023, he added.
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