SYDNEY: The Australian and New Zealand dollars were trying to stabilise on Wednesday as expectations for super-sized U.S rate hikes boosted the US dollar across the board, though surging local yields offered a sliver of support.
The Aussie did manage a bounce to $0.6913, having lost 0.8% overnight to a fresh one-month low of $0.6850.
A break of the May trough at $0.6829 would take it to levels not seen since the depths of the pandemic in mid-2020.
The kiwi dollar stood at $0.6237, after losing 0.7% overnight and breaching its May low to reach a two-year trough of $0.6197.
There is not much chart support now until $0.6000 and $0.5920.
Markets are now almost fully priced for the US Federal Reserve to hike rates by a drastic 75 basis points later on Wednesday, pressuring other central banks to follow.
Perhaps feeling the heat, Reserve Bank of Australia (RBA) Governor Philip Lowe took the unusual step of going on ABC television to warn that domestic rates would have to rise further if inflation was to be contained.
Lowe said “decisive” steps were required which was why the bank this month hiked by a surprisingly large 50 basis points to 0.85%, and could eventually take rates to 2.5%.
Adding to inflation risks was a sharp increase in the national minimum wage announced on Wednesday.
Australian dollar looks to extend yield advantage over yen
That led futures to price in some chance the RBA could move by 75 basis points at its next policy meeting in July, though 50 is still considered more likely.
“We interpreted Lowe’s comments as consistent with a more front-loaded tightening cycle,” said Andrew Boak, an economist at Goldman Sachs.
“We continue to expect the RBA to hike 50bp at July’s meeting, but now expect further 50bp increases in both August and September.” “Having removed emergency policy settings, we expect the RBA to then slow the pace of tightening to 25bp increases in each of the October, November and December meetings.”
If correct, that would see rates up at 3.1% by the end of the year, but still less than market pricing of near 3.75%.
Such aggressive pricing has been a hammer blow to bonds, sending three-year yields up to their highest since early 2012 at 3.76%.
Yields on 10-year bonds shot to 4.087%, the first move above 4% since 2014.
Indeed, the rise has even outstripped that of US Treasuries so widening the Australian yield premium to a six-year high of 66 basis points.
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