Key Takeaways
- Reserve Bank of Australia expected to hike rates further due to inflation concerns.
- Bond yields reach 15-year peaks, with three-year yields jumping 18 basis points.
- Investors bet on US Federal Reserve rate hike, supporting US dollar.
The Australian dollar has faced significant pressure, with bond yields reaching a 15-year high, as a spike in oil prices and inflation fears pushed investors to anticipate further interest rate hikes by the Reserve Bank of Australia (RBA).
According to Josh Williamson, head of Australian economics at Citi, the RBA needs to hike rates further to combat inflation, leading to expectations of two more hikes this year, with the terminal rate forecasted to reach 4.85%.
The market is now pricing in a 90% chance of a rate hike by the RBA at its September 29 meeting, with bond yields climbing to their highest levels since mid-2011. Three-year yields have jumped 18 basis points to 5.050%, while 10-year yields have reached 5.256%.
The Australian dollar was flat at $0.7161, having slid 0.8% overnight and pulled back from a four-month high of $0.7238. Initial support is seen at $0.7122, while major resistance lies at $0.7277.
The New Zealand dollar also took a hit, with bond yields jumping 13 basis points to 5.055%, their highest since late 2023. The key 2-year swap rate surged 21 basis points to 4.024%, as investors bet the Reserve Bank of New Zealand (RBNZ) would be forced to tighten more aggressively.
Investors are also ramping up wagers that the US Federal Reserve will raise rates at its meeting next week, providing broad support for the US dollar. This has led to a decline in the Australian dollar, with the kiwi dollar hanging on at $0.5811, after losing 0.7% overnight to hit a six-week low of $0.5795.
Major support for the kiwi dollar comes in at $0.5762, with resistance around $0.5900. The RBNZ had projected just one or two more quarter-point increases in the 2.75% official cash rate, but markets are now priced for four.
In our view, the RBA needs to hike further to get on the front foot of inflation, so we now expect two more hikes this year, lifting our terminal rate forecast to 4.85%.
Josh Williamson, Head of Australian economics at Citi
The market is underpricing the risk of back-to-back RBA hikes, which we believe are necessary to control inflation.
Josh Williamson, Head of Australian economics at Citi
