Australian dollar near highs on greenback, euro amid rate talk

SYDNEY: The Australian dollar hovered near multi-month highs on the greenback and euro on Tuesday as investors continued to wager on more rate hikes at home, widening yield spreads in its favour.

Speaking on Tuesday, Reserve Bank of Australia Assistant Governor Sarah Hunter reiterated that the policy board had little tolerance for stronger inflation and might have to raise interest rates for a fourth time this year.

Markets now imply a 68% probability rates will rise by 25 basis points to 4.60% at the policy meeting on September 29, up from less than 10% a month ago.

There is even a 60% chance rates will reach 4.85% next year.

“The likelihood of an additional rate hike has risen enough to make a November move the base case again,” said Luci Ellis, chief economist at Westpac.

“The main reasons for the shift are the growing evidence of a more resilient household sector, and a larger-than-expected impetus from the spillovers from the data centre boom.”

The hawkish shift has pushed yields on 10-year bonds to near their highest since mid-2011 at 5.195%, taking the spread over Treasuries to its widest in three months at 43 basis points.

That kept the Aussie firm at $0.7217, having touched a four-month top of $0.7225 overnight.

The next major targets are the May peak at $0.7277 and a high from mid-2022 at $0.7285, where a break would open the way toward $0.7500.

The Aussie also extended a recent rise on the euro, which slipped to a near two-year low of A$1.6085.

But it lost ground on a broadly firmer yen, slipping 1% overnight to 111.22 yen.

The kiwi dollar was off 0.3% at $0.5858, having run into sizeable selling against the Aussie in recent days as the market pared the chance of further aggressive tightening by the Reserve Bank of New Zealand.

The Aussie reached a fresh 13-year high at NZ$1.2330, with the next chart target up above NZ$1.2600.

Yet, surveys out on Tuesday underlined the pressure on the Australian economy from all the rate rise speculation, combined with higher fuel bills caused by the Iran conflict.

A NAB measure of business conditions sank to six-year lows in August amid a broad squeeze on profit margins, while a Westpac-MI index of consumer sentiment reversed sharply in September.