Aussie jumps on RBA hike; US dollar edges higher

THE Australian dollar jumped to its highest since mid-May on Tuesday (Jun 6) after the Reserve Bank of Australia (RBA) raised interest rates, in a decision that many analysts had said would be a close call between a hike and a pause.

The US dollar edged back towards last week’s 2.5-month highs versus major peers, after dropping on Monday following unexpectedly soft US services data that clouded the policy outlook for the months ahead.

The RBA raised the cash rate to an 11-year high of 4.1 per cent, saying the hike would provide greater confidence that inflation would return to target within a reasonable time frame, but adding that further tightening may be required.

The Aussie was last up 0.6 per cent at US$0.6656, after leaping as high as US$0.6686, a level last seen on May 16.

“The RBA’s second consecutive hawkish surprise should fuel an extension of the recent rally”, taking it through the 200-day moving average at 0.6692 initially, and then on to the 100-day moving average at 0.6748, said Sean Callow, a strategist at Westpac.

The RBA’s surprise move could also throw extra focus onto the Bank of Canada’s (BOC) policy meeting on Wednesday after it refrained from rates rises in March and April.

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“A 25 basis-point BOC rate hike tomorrow... would probably cause ripples across core bond markets around the world, and could keep the US dollar bid on the view that the Fed might be closer to hiking than first thought,” ING’s global head of markets Chris Turner said.

The US dollar fell 0.1 per cent against its Canadian counterpart to US$1.3428.

Central focus

Meanwhile, US rates have been a central focus for investors globally, with recent data and Federal Reserve (Fed) rhetoric causing volatility in the US currency.

The US dollar index – which measures the currency against six major peers – was up 0.1 per cent at 104.15, after a shaky few days during which it rallied to a 2.5-month peak at 104.70 on the final day of May, only to get knocked back by suggestions from Fed officials that they would skip a rate hike in June.

However, hot employment numbers on Friday saw bets for a July hike ramp up, while Monday’s weak services sector outcome has yet again clouded the outlook for rates.

The Federal Open Market Committee (FOMC) sets policy on Jun 14, and markets are now pricing in a 75 per cent chance of the Fed standing still, a sharp jump from a 36 per cent chance a week earlier, according to the CME FedWatch tool.

“We have had a long-held belief that the Fed will pause next week, and the market pretty much agrees,” said Mohamad Al-Saraf, associate, FX and rates strategy at Danske Bank.

With no major US data for the remainder of the week and Fed officials in a “blackout” period, Al-Saraf expects it could be a quiet time for the euro against the greenback ahead of the Fed and European Central Bank policy meetings next week.

“For this week it will be wait-and-see mode for euro-US dollar,” Al-Saraf said, expecting euro-US dollar to remain rangebound around 1.07.

Meanwhile, the US dollar was flat at 139.58 yen, while sterling fell 0.2 per cent to US$1.2410.

Elsewhere, bitcoin attempted to find its feet around US$25,700, after tumbling 5.1 per cent on Monday in its biggest drop since Apr 19.

The Securities and Exchange Commission (SEC) sued Binance and its CEO Changpeng Zhao on Monday for allegedly operating a “Web of deception”, saying the exchange artificially inflated its trading volumes, diverted customer funds, failed to restrict US customers from its platform and misled investors about its market surveillance controls. REUTERS