The Australian dollar retreated against the strong US dollar on Thursday but held at 17-year highs against the battered yen, while domestic bonds were hammered by risks of a rate hike this year.
The Aussie also jumped the Kiwi to hit the highest level in a month as their respective central banks’ rate outlooks diverged. Markets continue to bet that interest rates in New Zealand will fall this year.
The Australian dollar was trading at $0.6648, having given up all of its post-CPI gains overnight to hold steady amid the rise in the US dollar. However, it firmed in a series of crossovers, hitting a new 17-year high of 106.98 yen and a one-year high in the euro.
Bonds, already sold off following May’s hot Australian inflation report, took another hit on Thursday as Treasury yields rose overnight, helping the broader US dollar.
Three-year government bond futures fell another 10 ticks and broke major support to trade at 95.83, the lowest level in seven months. 28 ticks fell in the last two days, the biggest two-day drop since September 2022.
Swaps point to a 42% chance of a quarter-point rate hike by the Reserve Bank of Australia in August, depending on the outcome of the full second-quarter CPI report due out at the end of July. Prospects for any rate cut have disappeared for this year.
On Thursday, Citi joined Deutsche Bank and UBS in calling for an August hike from the current 4.35% spot rate.
“The RBA is now at serious risk of missing its inflation target by the end of 2025,” Citi economists said in a note to clients. “Risks lean towards another rise if inflation does not behave.”
RBA Deputy Governor Andrew Hauser will deliver a speech at 7:30 p.m. local time (09:30 GMT), which will be closely watched for any mention of a rate hike as the central bank has held policy steady for five meetings. consecutive now.
The kiwi fell 0.1% on Thursday to $0.6078, the lowest level in a month and a half, partly due to weakness against its Australian cousin. Overnight it fell 0.6%, with support now at $0.6040/50.
The Kiwi lost 0.7% overnight against the Aussie, the biggest daily drop since December last year.
