Australian dollar wobbles ahead of RBA, New Zealand dollar having best month in a year

THE Australian dollar wobbled on Monday ahead of a policy rate decision by the Reserve Bank of Australia, while its New Zealand counterpart enjoyed its best month in a year on hawkish rate hike expectations for its central bank.

The Aussie was hovering around US$0.6414, unwinding sharp gains from a few sessions ago, which saw the Antipodean hit the highest level in three weeks on hopes of a pivot in the global tightening cycle.

It also slipped 0.7 per cent on Friday and was heading for a meagre 0.1 per cent gain for the month.

The kiwi skidded 0.2 per cent to US$0.5805, after hitting the strong level since late September in the previous session.

It also surged a whopping 3.6 per cent for October, riding on bets that the Reserve Bank of New Zealand would raise rates aggressively to tame runaway inflation.

The weaker-than-expected PMI figures from China did not produce a material impact in the two currencies. “AUD can fall back to last week’s lows if the RBA raises the cash rate by only 25bp. A 50bp hike though would underpin AUD via narrowing Australia-U.S. interest rate differentials,” said Carol Kong, a senior currency strategist at CBA.

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Australia set for another close call on interest-rate decision

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Australia’s central bank will raise the interest rate on Tuesday for the seventh time this year. Although markets are leaning towards an increase of 25 basis points, some economists have called for a 50bp rise, after an alarmingly hot inflation report. Futures and swaps now imply around an 80 per cent chance of a quarter-point increase to 2.85 per cent on Nov 1 , and 20 per cent for a larger move. “The RBA should hike by 25bp, and while there are calls for 50bp, this seems a hero call driven by last week’s above consensus CPI/PPI print,” said Chris Weston, head of research at Pepperstone. “We see AUD/USD 1-week implied (volatility) at 17.4 per cent, which is the highest in G10 FX – so the market is looking here for movement.”

Australia government bonds, which have rallied on central bank pivot hopes, held steady on Monday. Three-year yields were mostly unchanged at 3.302 per cent, while ten-year yields edged up 2 bp to 3.783 per cent. REUTERS