Australian dollar succumbs to risk retreat, still ahead on week

SYDNEY: The Australian dollar was looking crestfallen on Friday as intensifying risk aversion globally finally overcame support from higher yields, though it still held weekly gains on a crowd of peer currencies.

The Aussie was flat at $0.7080, having slipped 1.0% overnight and away from a 45-month peak of $0.71875. Support now lies around $0.7054 and $0.6945.

That was still 0.7% firmer for the week, making the Aussie one of very few currencies to gain on the greenback.

The Aussie eased from a 35-year top on the yen and a 15-month high on the euro, but remained sharply higher for the week on both currencies.

The kiwi dollar has had a tougher time given New Zealand is a net importer of energy, losing 0.8% for the week to stand at $0.5854.

A break of support at $0.5837 would risk a retreat to $0.5712.

Bonds have also had a rough week as rising oil prices fed inflation fears globally, lifting 10-year yields 13 basis points so far this week to as far as 5.00%, highs not seen since mid-2011.

Worries about inflation have seen markets sharply narrow the odds on the Reserve Bank of Australia hiking the cash rate a quarter point to 4.10% at its March 17 board meeting.

“We now factor in a hike in March as a bit more likely than a hold, pulling forward our earlier view for a hike in Q3,” said Paul Bloxham, chief economist Australia at HSBC. “However, it is not a ‘slam dunk’,” he added.

“The RBA could still choose to hold and to cite high uncertainty, particularly if the next few days brings further significant market-relevant turbulence in the Middle East.”

He joins all four of the major Australian banks in tipping a rate rise next week, with most also looking for a move to 4.35% in May. Markets imply around an 80% chance of March hike and are fully priced for 4.35% by August.

The latter would equal the post-pandemic peak for rates hit when core inflation peaked at 6.8%.

Core inflation is currently only 3.4%, but risks staying above the RBA’s 2% to 3% target band for a protracted period should policy not be tightened.

A gaggle of other central banks meet next week and are expected to stay on hold, with a risk the Federal Reserve and European Central Bank sound more hawkish on inflation.