SYDNEY: The Australian and New Zealand dollars eased off multi-week highs on Monday as a US holiday offered an excuse to consolidate recent sharp gains, while a hawkish outlook for Australian rates underpinned a major rally on the yen.
The Aussie softened to $0.6855, having surged almost 2% last week to a four-month high of $0.6900, which was also a major retracement level.
The Aussie has now climbed four cents in less than three weeks and is overdue a pause.
The kiwi dollar dipped to $0.6220, after rising 1.7% last week to a three-week top of $0.6247. The next major chart target is just above $0.6300.
The gains reflect a general improvement in global risk sentiment combined with a drastic shift in investor expectations for higher Australian rates and upbeat jobs data.
Futures markets now imply the current 4.1% cash rate will peak around 4.6%, a marked change from a month ago when some thought 3.85% would be the top.
“As has been the case overseas, inflation has proven persistent and slow to respond to tighter monetary policy,” said Adam Boyton, head of Australian economics at ANZ.
“We continue to think the RBA has more to do and look for a peak in the cash rate of 4.60% in August.”
Westpac and NAB also expect the Reserve Bank of Australia (RBA) to hike in July and August, while CBA looks for a top of 4.35%. Goldman Sachs is tipping hikes in July, August and September given the strength shown in the May jobs report.
“At 3.55%, we note Australia’s unemployment rate is now 36bps below its level in May 2022, despite the RBA hiking rates +400bps since then,” wrote Goldman analysts.
Minutes of the RBA’s June policy meeting on Tuesday will offer more clues on the outlook, as will a speech by RBA Deputy Governor Michelle Bullock.
The shift in view has seen Australian 10-year bond yields rise 70 basis points in the past month to 4.0%, highs not visited since last January.
That has widened the spread over yields in the US and, particularly, Japan where monetary policy remains super loose.
The spread over Japanese 10-year yields is at its highest this year at 360 basis points, having rebounded from a low of 272 basis points back in April.
That divergence has lifted the Aussie to a nine-month high on the yen at 97.67, having jumped 3.8% last week to challenge its 2022 high of 98.43.
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