Foreign Currency

Traders see zero chance of RBA rate relief


Australia is the only major economy where traders are primed for the chance of a rate increase. Even in the United States, they are betting the Federal Reserve’s next move is down.

Fed fund futures are fully priced for the first easing in September and that will be the only rate cut in 2024. Earlier this year, they had expected six quarter-point reductions.

For New Zealand, Europe, UK and Canada, the market ascribes between one basis point and 16 basis points of rate cuts at their next policy meetings.

This compares with one basis point, or a 5 per cent chance of a rate rise to 4.6 per cent at the RBA’s policy meeting on May 7. Before the data, the market had ascribed a 9 per cent probability to a rate cut next month.

Yields on Australia’s policy-sensitive three-year government bonds soared to 4.04 per cent, up 14 basis points, in the biggest one-day gain since June last year. It was the first time since December they topped 4 per cent. The bond market was closed on Thursday for Anzac Day.

Bloodbath

“If we do see a shift towards rate hikes, there will be a renewed wave of bond selling on short-covering,” said Warren Hogan, chief economic adviser at Judo Bank, noting that the investment community was largely positioned “neutral”, meaning it was betting the cash rate would hold steady.

Warren Hogan predicts that Australian bond yields could climb to new peaks after inflation data. Peter Rae

“Australian bond rates are going to get to new highs in the next month,” he predicted.

The RBA cash rate has been on hold at 4.35 per cent since November as policymakers assess whether Australia will continue on the narrow path to a soft economic landing and return inflation to its 2 per cent to 3 per cent target.

Last month, RBA governor Michele Bullock said she would not rule anything in or out on policy, meaning interest rates could go up or down. The central bank will not be pleased by the inflation report, which came on the heels of a labour force report that underscored a still-tight job market.

In the currency world, the Australian dollar struggled to keep Wednesday’s gains when it climbed to US65.29¢. It traded at US65¢.

“Since yesterday’s CPI report, we’ve seen fresh weakness in the Japanese yen and the offshore Chinese renminbi, to which the Australian dollar has been highly correlated of late,” said Ray Attrill, head of FX strategy at National Australia Bank.

The local dollar dropped to a five-month low of US63.60¢ last week, when the Middle East conflict escalated.

Meanwhile, the foreign exchange market was on tenterhooks for a possible intervention by the Bank of Japan to protect its struggling yen which has collapsed 10 per cent against the US dollar this year.

This is because the buoyant greenback broke above the ¥155 level for the first time since 1990 on Wednesday, a level deemed as a benchmark for Japanese authorities. The breach comes as the Bank of Japan starts its two-day policy meeting where it is expected to keep the short-term interest rate target unchanged following last month’s landmark exit from negative rates.



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