SYDNEY: The Australian and New Zealand dollars hovered near their highest levels in weeks on Monday ahead of a near-certain hike in Australian interest rates, and likely the promise of more to come.
The Aussie was holding at $0.6997, having run into resistance at Friday’s six-week peak of $0.7032. The kiwi dollar nudged up to $0.6295, after hitting a five-week top of $0.6326 on Friday.
The Reserve Bank of Australia (RBA) is widely expected to lift its cash rate by 50 basis points to 1.85% on Tuesday, the fourth hike since May and the most aggressive tightening in decades.
Markets gave up on a 75-basis-point hike after June quarter inflation data proved high, but not outrageously so.
Yet the RBA is also likely to revise up its forecast for inflation and lower that for unemployment, ensuring it keeps signalling further hikes ahead.
“There is a clear priority placed on forestalling a shift higher in inflation expectations even as the RBA seeks to chart a path back to 2-3% inflation while sustaining low unemployment,” said Taylor Nugent, an economist at NAB.
“We see 50bp hikes in each of August and September, before a slowing to 25bp increments in October and November.”
Australian dollar slips, bonds rally as inflation fails to shock
Investors have scaled back the likely peak for rates to 3.40%, when it had been as high as 4.25% in June.
That outlook was supported by data showing house prices fell at a faster pace in July, with Sydney seeing some of the steepest falls in 40 years.
Job ads also dipped 1.1% in July, though they remain at very high levels that should see unemployment slip further from its 48-year trough of 3.5%.
Investors have similarly lowered expected peaks for US and EU rates, sparking a huge rally across bond markets.
Australian three-year bond yields were at 2.765%, having fallen 45 basis points last week to the lowest since April.
Not everyone is convinced the RBA will be so dovish. Nomura economist Andrew Ticehurst argues the RBA will hike by 75 basis points this week, in part because many other central banks are have stepped up the pace of tightening.
He also pointed to the dive in unemployment and evidence of price pressures in business and consumer surveys.
“In short, we think that current conditions, relative to current policy settings, warrant an outsized rate hike,” he added. “We believe the RBA is more focused on taming inflation at present, rather than guarding against risks to growth.”
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