Key Takeaways
- The Australian dollar is near multi-month highs against the greenback and euro.
- Reserve Bank of Australia Assistant Governor Sarah Hunter reiterated the bank's commitment to fighting inflation.
- Markets now predict a 68% chance of a 25 basis point interest rate hike at the September 29 meeting.
The Australian dollar has reached near multi-month highs, hovering around $0.7217, as investors continue to speculate on further interest rate hikes by the Reserve Bank of Australia (RBA).
Assistant Governor Sarah Hunter of the RBA stated that the policy board has little tolerance for stronger inflation and might raise interest rates for a fourth time this year.
The probability of an additional rate hike has increased, with markets now predicting a 68% chance of a 25 basis point increase at the September 29 policy meeting, up from less than 10% a month ago.
The hawkish stance has pushed 10-year bond yields to near their highest since mid-2011 at 5.195%, widening the yield spread over Treasuries to its widest in three months at 43 basis points.
The Australian dollar has extended its recent rise against the euro, which has slipped to a near two-year low of A$1.6085, and lost ground against the yen, falling 1% to 111.22 yen.
The kiwi dollar has also been affected, off 0.3% at $0.5858, as the market reduces expectations of further aggressive tightening by the Reserve Bank of New Zealand.
The Aussie reached a fresh 13-year high at NZ$1.2330, with the next chart target up above NZ$1.2600, reflecting the strong performance of the Australian dollar.
However, surveys indicate that the rate rise speculation, combined with higher fuel bills due to the Iran conflict, are putting pressure on the Australian economy. A NAB measure of business conditions sank to six-year lows in August, amid a broad squeeze on profit margins.
A Westpac-MI index of consumer sentiment reversed sharply in September, highlighting the economic challenges posed by the rate hike speculation and higher fuel costs.
The likelihood of an additional rate hike has risen enough to make a November move the base case again.
Luci Ellis, Chief Economist at Westpac
