Australia, NZ dollars buoyed as markets ramp up rate expectations

SYDNEY: The Australian and New Zealand dollars were looking to rally for a fourth straight session on Wednesday after markets narrowed the odds of more aggressive rate hikes ahead as central banks globally rushed to catch up with inflation.

The Aussie was up at $0.6901, having gained 1.3% on Tuesday to break resistance around $0.6855.

The bounce took it further away from last week’s two-year trough of $0.6682 and set up a test of chart resistance in the $0.6910/15 area.

The kiwi dollar reached $0.6238, after climbing 1.1% overnight and away from its recent low of $0.6061.

It faces chart resistance around $0.6290. Both had gained from a pullback in the US dollar triggered by a Reuters report the European Central Bank was considering raising interest rates by an outsized 50 basis points at its policy meeting on Thursday.

The report also fuelled talk the Reserve Bank of Australia (RBA) might step up the pace of tightening by hiking by 75 basis points at its policy meeting in August.

Australia, NZ dollars get lift from sky-high inflation

Markets imply around a 30% chance of such a move in the 1.35% cash rate, and a peak next year at 3.75% or more. RBA Governor Philip Lowe on Wednesday emphasised higher rates were needed to anchor inflation expectations and suggested the neutral level for policy was at least 2.5%.

“While a close call, we continue to expect the RBA to increase the cash rate 75bp in August and 50bp in September, before slowing the pace of hikes to achieve a modestly contractionary rate of 3.35% by year-end,” said Andrew Boak, an economist at Goldman Sachs.

Much might depend on what consumer price figures for the second quarter show next week, with analysts expecting another sharp acceleration in annual inflation to above 6%.

A high outcome would follow the recent surprise dive in unemployment to a 48-year low of 3.5%.

“Together they may prompt the RBA to consider a larger rate rise in August to return to a neutral setting slightly more quickly,” said Tapas Strickland, a director of economics at NAB.

“Our current prediction is 50bps in August and 25bps in September, November, and February, but the risk is rising that the RBA sees the need to get rates to the broadly neutral 2.6% level earlier than we forecast.”

Bond markets are priced for more, with three-year yields at 3.27% having climbed 19 basis points in the past week.