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. 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.