Australia dollar boosted by minimum wage hike, yields jump

SYDNEY: The Australian dollar advanced and local bond yields jumped on Friday as markets wagered that a large hike in the minimum wage could force the central bank’s hand next week. Rebounding commodity prices and the US averting a debt default also buoyed sentiment.

The Aussie rose 0.5% to $0.6608, after rallying 1.1% overnight to pull away from a six-month low of $0.6459 hit on Wednesday. It is now headed for a weekly gain of 1.4% and faces resistance at the 21-day moving average of $0.6632.

The kiwi was up 0.3% to $0.6088, having risen 0.8% overnight to move away from a six-month trough of $0.5986.

It is up 0.6% for the week and faces resistance around $0.6384.

After tumbling on concerns about China’s economy, the Aussie received a reprieve on Friday after the country’s Fair Work Commission determined a 5.75% pay rise for workers on awards and a 8.6% increase for the lowest-paid employees.

“The large increase in minimum award wages announced today will likely be of concern to the RBA, as this could boost inflation expectations and delay the return of inflation to target,” said Andrew Ticehurst, a senior economist at Nomura.

“We now think it more likely than not that the RBA will raise its cash rate by 25bp next week, to 4.10%.” Markets are now split on whether the RBA would raise rates next week, after leaning towards a pause earlier.

They are also wagering that the current cash rate of 3.85% is certain to reach 4.1% by August, with the risk of another hike. Local bond yields jumped.

Australian dollar struggles as market reverses course on rates

Three-year Australian government bond yields rose 4 basis points (bps) to 3.44%, the highest in five days, while ten-year gained 5 bps to 3.645.

Also aiding sentiment was news that the US Senate passed bipartisan legislation lifting the government’s $31.4 trillion debt ceiling, averting what would have been a first-ever default.

Traders are now positioning for the release of the US nonfarm payrolls report later in the day for more clues on the Fed’s next move.

Economists are expecting the US economy added 190,000 jobs in May, slowing from 253,000 in the previous month.

Fed funds futures now price in a 70% chance that the Fed will pause its rate hikes this month, after Philadelphia Fed President Patrick Harker said the central bank should not raise rates at the next meeting.