SYDNEY: The Australian dollar was under pressure on Tuesday after the country’s central bank left interest rates unchanged, while a warning that further tightening might yet be needed did little to narrow the currency’s yield deficit against the U.S. dollar.
The Aussie was off 0.3% at $0.6344, extending a 1.1% slide on Monday. The retreat threatened support at the recent 11-month low of $0.6332.
The kiwi dollar eased 0.3% to $0.5925, having lost 0.8% the previous session. It has chart support around $0.5900.
The Reserve Bank of Australia (RBA) kept rates at 4.1% after its monthly policy meeting, saying recent economic data were consistent with inflation slowing as desired.
There had been some speculation newly promoted governor Michele Bullock might sound more hawkish on inflation, but the statement was much like the one from last month.
“The RBA board has opted for a strong sense of continuity in its communications,” noted Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia.
“The economy has outperformed expectations to date, but is slowing appreciably,” he added. “Upside risks to inflation continue to cloud the outlook, but with the full impact of rate hikes yet to be felt, we expect the RBA will keep rates on hold for the next year.”
Markets were been heavily priced for a steady outcome this month, though have recently shifted to imply more risk of a hike given resilience in the domestic labour market and stubbornness in service sector inflation.
Futures imply around a 36% chance of a rate rise in November and are fully priced for a move to 4.35% by May next year. A slim majority of economists polled by Reuters also tip one more rise this cycle.
The hawkish outlook in part reflects expectations U.S. rates will stay high for longer, which has seen global bond yields surge in recent weeks.
Yields on Australian 10-year debt hit an 11-year high of 4.61% early Tuesday, having climbed 51 basis points in just 12 sessions.
Yet that still lagged the move in U.S. markets, such that Australian bonds now pay 11 basis points less than Treasuries compared to as much as 31 basis points more back in July.
The Reserve Bank of New Zealand (RBNZ) holds it policy meeting on Wednesday and is widely expected to keep rates steady at 5.5%.
Imre Speizer, an economist at Westpac, suspects the RBNZ statement will note the recent flow of economic news has been firmer than expected.
“This scenario, to which we assign a 50% chance, would retain the tightening bias introduced in August, and should be market-neutral given a 60% chance of a November hike is priced,” he said.