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SYDNEY: The Australian dollar wobbled on Monday ahead of a policy rate decision by the Reserve Bank of Australia, while its New Zealand counterpart enjoyed its best month in a year on hawkish rate hike expectations for its central bank.

The Aussie was hovering around $0.6414, unwinding sharp gains from a few sessions ago, which saw the Antipodean hit the highest level in three weeks on hopes of a pivot in the global tightening cycle.

It also slipped 0.7% on Friday and was heading for a meagre 0.1% gain for the month.

The kiwi skidded 0.2% to $0.5805, after hitting the strong level since late September in the previous session.

It also surged a whopping 3.6% for October, riding on bets that the Reserve Bank of New Zealand would raise rates aggressively to tame runaway inflation.

The weaker-than-expected PMI figures from China did not produce a material impact in the two currencies.

“AUD can fall back to last week’s lows if the RBA raises the cash rate by only 25bp.

A 50bp hike though would underpin AUD via narrowing Australia-US interest rate differentials,“ said Carol Kong, a senior currency strategist at CBA.

Australia’s central bank will raise the interest rate on Tuesday for the seventh time this year.

Although markets are leaning towards an increase of 25 basis points, some economists have called for a 50bp rise, after an alarmingly hot inflation report.

Australian dollar the whipping boy as global fears mount

Futures and swaps now imply around an 80% chance of a quarter-point increase to 2.85% on Nov. 1, and 20% for a larger move.

“The RBA should hike by 25bp, and while there are calls for 50bp, this seems a hero call driven by last week’s above consensus CPI/PPI print,” said Chris Weston, head of research at Pepperstone.

“We see AUD/USD 1-week implied (volatility) at 17.4%, which is the highest in G10 FX – so the market is looking here for movement.”

Australia government bonds, which have rallied on central bank pivot hopes, held steady on Monday.

Three-year yields were mostly unchanged at 3.302%, while ten-year yields edged up 2 bp to 3.783%.


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