SYDNEY: The Australian dollar pared early gains on Tuesday after the country's central bank again pushed back against market pricing for a rate hike in 2022, though bond investors seemed happy to wager the bank would ultimately prove to be wrong.
The Aussie faded to $0.7351 and away from resistance at $0.7370, but remained some distance from the recent five-week trough at $0.7277.
The New Zealand dollar held firm at $0.7060, again some way from last week's low of $0.6997.
Both had been aided by a sharp selloff in the euro, which slid 0.9% on the Aussie overnight to A$1.5464.
But Aussie bulls got no help from Reserve Bank of Australia (RBA) Governor Philip Lowe who again dismissed market pricing for a hike in the 0.1% cash rate next year, saying recent data and forecasts did not warrant such a move.
The futures market clearly disagreed, with a first move to 0.25% implied by June and further hikes toward 1.0% by year end.
Investors are generally wagering that global inflationary pressures will be more lasting than the RBA, and other central banks, assume. Many also assume the US Federal Reserve will start tightening by mid-year, so making it harder for the RBA to sit still.
Lowe argued that there was more inertia in wages and inflation in Australia, which set it apart from the US experience. Core inflation of 2.1% was only just back in the RBA's target band of 2-3% after six years of downside misses.
Hayden Dimes, an economist at ANZ, noted that headline consumer price inflation in Australia actually slowed last quarter when it was accelerating elsewhere, and at 3% was half of the US level.
"Also, wages growth in the US did not slow by nearly as much as in Australia and has already accelerated meaningfully above pre-pandemic levels," said Dimes.
Data on Australian wages are due on Wednesday and are forecast to show annual growth picking up to just 2.2%, well below US annual average earnings growth of 4.9%.
"Our view is that inflation here is unlikely to accelerate to anywhere near the levels seen in places like the US," said Dimes.
"Instead, we anticipate headline inflation remaining around current levels, whilst underlying inflation accelerates but stays within the RBA's target band."