Australian dollar steady after turbulent week, with focus on hawkish RBA

SYDNEY: The Australian dollar steadied on Monday following two consecutive weeks of losses as a war in the Middle East rages, while traders braced for a possible trade hike Down Under as surging oil prices increased concerns about inflationary risks.

The Aussie edged up 0.4% to $0.7010, after plunging 1.4% on Friday to finish the week 0.8% lower.

Despite the decline, the currency performed better than many of its peers, supported by Australia’s position as a net energy exporter and by higher bond yields.

The kiwi dollar also bounced 0.4% to $0.5802, though it had fallen 2% last week as New Zealand is a net energy importer.

Technical charts show limited support until 0.5712, the low recorded in January.

Against a backdrop of market turmoil, eight central banks are meeting this week, with investors closely monitoring their views on inflation. Most, including the US Federal Reserve and the European Central Bank, are expected to keep policy unchanged.

The exception is the Reserve Bank of Australia, which is widely expected to raise interest rates by a quarter point to 4.1% on Tuesday.

A majority of economists, 23 of 30, now forecast a quarter-point rate hike after RBA Governor and Deputy Governor suggested the meeting was live amid already elevated inflation risks.

Swaps imply a 77% probability of such a move. “Given all the uncertainty we think the RBA should leave rates on hold at its meeting on Tuesday,” said Shane Oliver, chief economist at AMP.

“However, we now think the RBA will hike… the bank appears very concerned the boost to inflation from the war’s impact on oil prices will add to inflation expectations – which were already on the rise again - making it even harder to get inflation back down.”

A decision by the RBA to keep policy unchanged would come as a shock to markets and economists.

If the central bank delivers a rate hike, attention will shift to its guidance on future tightening, with markets currently pricing in three additional increases by the end of the year that could lift rates to 4.6%, above the previous peak of 4.35%.

Three-year bond yields held at 4.567% on Monday, after surging 34 bps these two weeks to as high as 4.622%, a 15-year high, while the spread over Treasuries has widened to a tempting 85 basis points.

Across the Tasman sea, the Reserve Bank of New Zealand has the benefit of waiting until early April to decide on its next policy move. Markets are wagering on a hike in September, although the RBNZ has itself said a rise by the year end is not fully baked in their expectations given a weak economy.

Two year swap-rates rose 3 basis points to 3.3455%, after jumping 40 bps over the past two weeks to tighten financial conditions.