Australian Dollar Set to Post Weekly Gains

The Australian dollar fell below $0.70, hitting a nine-week low despite the central bank’s widely expected interest rate hike. In a unanimous decision, the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.60%, the highest level since 2011, citing persistent inflationary pressures and higher global energy prices stoked by the Middle East conflict. The central bank has now raised rates four times this year by a total of 100 basis points, but the September move has already been largely priced into markets. Swaps priced in a 56% chance of a follow-up move in November, while the odds of a December hike stood at 60%. Meanwhile, the Aussie remained under pressure from a stronger US dollar and higher Treasury yields, as markets continued to price further Federal Reserve tightening. Attention now turns to Australia’s August inflation data due on Wednesday after a stronger-than-expected July core inflation reading reinforced concerns about persistent price pressures.

The Australian dollar traded around $0.70, near an eight-week low as investors remained cautious ahead of the Reserve Bank of Australia’s monetary policy meeting. The Aussie finished 1.4% lower last week, its third straight weekly loss, battered by a broadly stronger US dollar and elevated US Treasury yields as the Federal Reserve raised interest rates earlier this month and signaled the possibility of further increases. The losses came despite markets having largely priced in a 25-basis-point rate hike to 4.60% by the RBA on Tuesday, its fourth rate hike this year. Markets are pricing in about 40 bps of more tightening after Tuesday. Attention is also on the upcoming monthly inflation data for August. Forecasts are centered on an annual rise of 4% in headline inflation, picking up from 3.5% in July, as petrol prices jumped, while underlying inflation remained sticky at 3.6%. Oil prices remained elevated as uncertainty persisted over whether the US and Iran could reach a truce soon.

The Australian dollar weakened to around $0.70, hitting a seven-week low as a stronger US dollar and a renewed selloff in global bond markets weighed on risk-sensitive currencies. The move came despite Australian employment rising by a stronger-than-expected 39,500 in August, well above forecasts for a 20,000 increase, while jobless rate edged up to 4.6%, its highest in five years, pointing to mixed labor-market conditions. The report was the final major economic release before the Reserve Bank's September 28–29 meeting and persistent inflation risks are keeping the central bank on track for another rate hike. Markets are pricing a 95% chance of a 25-bp hike to 4.60% in September and a possible peak around 5.10%. Meanwhile, the 10- and 30-year US Treasury yields rose to their highest levels since 2007 and 2004, respectively, while the dollar climbed to a near two-month high as stronger US economic data and elevated oil prices fueled concerns over inflation and higher interest rates.