Australian dollar slip from 36-year peak on yen as BOJ holds rates

SYDNEY: The Australian dollar retreated from a 36-year top on the yen on Tuesday as the Bank of Japan held rates but saw more dissent, while investors awaited a domestic inflation report that could seal the case for more policy tightening.

The Aussie slipped 0.3% to 114.22 yen, having hit a 36-year peak of 114.7 yen earlier in the day as traders bet on widening interest rate differentials before the BOJ decision.

However, three in the nine-member board proposed hiking borrowing costs, a hawkish result that had markets pricing in a 55% chance of a hike in June.

“The hawkish tilt to the Bank of Japan decision raises the chances of a rate hike in June. But by that meeting, the RBA is likely to have raised its cash rate for a third straight meeting and flagged more to come. This keeps carry trades firmly in play for now,” said Sean Callow, a senior FX analyst at ITC Markets.

Against the US dollar, the Aussie was also 0.1% lower at $0.7180, having gained 0.5% overnight to rally above the 10-day moving average of $0.7162.

Resistance is at the four-year top of $0.7222.

News that the US was reviewing a proposal from Iran to end the Middle East conflict helped the Antipodean currency a little, but President Donald Trump was not happy about the proposal because it did not address Iran’s nuclear programme.

“From a technical perspective, we are likely in for a bit more near-term consolidation,” said Tony Sycamore, analyst at IG.

“We believe the short-term and medium-term uptrend in the AUD/USD remains intact. The next major upside target would then sit at 0.7400.”

All eyes are now on Australia’s first-quarter inflation report due on Wednesday.

Forecasts are centred on a quarterly rise of 1.4% in headline inflation as energy costs jump, lifting the annual rate to 4.2% from 3.6%, way above the target band of 2%-3%.

The trimmed mean measure of core inflation - closely watched by the RBA - likely ran 0.9% in the quarter, lifting the annual rate to 3.5%, still uncomfortably high.

That left little room for surprises for the Reserve Bank of Australia, which has already hiked interest rates twice this year to 4.1%.

Any beat would seal the case for another rate hike next month, which is already priced at an elevated 82%.

The New Zealand dollars also eased 0.2% on Tuesday, after rallying 0.5% overnight.

Resistance is heavy at $0.5930. Markets are leaning towards a quarter-point rate hike from the Reserve Bank of New Zealand in May, which is about 63% priced in, after a hot inflation reading last week.