Australian dollar steady as RBA debates third rate hike

SYDNEY: The Australian dollar held firm on Monday ahead of a crucial central bank policy update that could take rates back to their post-pandemic highs, while the kiwi awaited a jobs report for clues on whether the economy can handle tighter policy.

The Aussie was steady at $0.7206, after gaining 0.7% last week to reach $0.7228, its strongest since June 2022.

It now faces resistance around $0.7250 and $0.7283, with support at $0.6834.

Much is now riding on a rate decision from the Reserve Bank of Australia on Tuesday, where a quarter-point rise in the 4.1% cash rate is about 85% priced in by markets. That would take it back to its post-COVID peak of 4.35% when inflation was running at above 7%.

Thirty of 33 economists polled by Reuters also expected a hike but markets are much more hawkish on the outlook for more policy tightening, with a total of 60 basis points priced in by the year-end.

“We see the decision as finely balanced, in contrast to the market’s high conviction of a hike,” said Kristina Clifton, a senior currency strategist at the Commonwealth Bank of Australia, which is expecting a hike.

“Another split vote like in the March meeting can prompt the market to pare back expectations of additional rate hikes and weigh on AUD/USD.”

Kerry Craig, a global market strategist at JPMorgan Asset Management, expects the Australian dollar to end the year around 70 cents as bets of more rate hikes unwind and the economy weakens.

“I think as we see those rate hikes being taken out…as we see some of the weakness in the economy start to come through, maybe that rotation again to focus on growth, rather than inflation, you’d see that currency start to come down,” he said.

The benchmark 10-year Australian government bond yield fell 3 basis points to 4.997%, moving away from a one-month high of 5.087%.

The kiwi dollar was last 0.3% higher at $0.5912, after edging up 0.2% last week to $0.5925, which is proving to be near-term resistance.

It also bounced off a 13-year low on the Aussie hit earlier in the day and was last up 0.2%.

All eyes are on a domestic jobs report due on Wednesday where forecasts are for a 0.2% quarterly rise in employment in the first three months of the year, slowing from 0.5% before.

The jobless rate likely held steady at a decade high of 5.4%.

Prasanna Gai, an external member at the Reserve Bank of New Zealand’s monetary policy board, said the shock from the Strait of Hormuz closure does not imply “a reflexive tightening bias”.