Australia dollar slips, bonds rally as RBA softens hawkish outlook

SYDNEY: The Australian dollar slipped on Tuesday after the country’s central bank raised interest rates as expected but softened its hawkish guidance on policy, sparking a rally in bonds as markets lengthened the odds on further hikes.

The Reserve Bank of Australia (RBA) lifted its cash rate 25 basis points to 3.60%, the 10th straight move since last May when rates were at an all-time low of 0.1%.

However, RBA Governor Philip Lowe noted recent data had lessened the risk of a price-wage spiral and dropped a reference to more rate “increases” being needed over the months ahead.

“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target,” was Lowe’s new formulation, suggesting just one more hike might be enough.

Three-year bond futures duly rallied 16 ticks to 96.640, as investors priced in a greater chance that the RBA might pause at 3.85% rather than pushing on to 4.10% or higher.

That saw the Aussie ease 0.4% to $0.6700, having already slipped 0.5% overnight.

Major support lies at $0.6695, with resistance around $0.6790.

Investors also sold the Aussie against its New Zealand counterpart, knocking it down 0.5% to NZ$1.0804. That helped the kiwi hold firm at $0.6202.

The RBA had taken a hawkish turn in February after consumer price data for the December quarter showed core inflation climbed more than expected and became more broad-based.

Australian dollar climbs as RBA hikes, sounds hawkish on outlook

However, data since then has been generally softer with unemployment rising, economic growth disappointing and wages not climbing as fast as feared. Lowe acknowledged the better news on wages and noted a slowdown in household consumption and economic growth.

“Despite rhetoric around further tightening, the accompanying remarks highlighted the combination of slower growth, an inflation peak and weaker consumption given already tight financial conditions,” said Dwyfor Evans, head of APAC macro strategy at State Street Global Markets.

“The focus on services inflation gives the statement a sop to the hawks, as does the tight labour market, but a reluctance to over-tighten into a real sector slowdown looks a key factor for the RBA in what is a slightly dovish communication.”