Forex Market: AUD/USD surges as RBA hikes at faster pace than expected, flags further tightening

AUD/USD traded within an almost 100-pip range on Tuesday, after the Reserve Bank of Australia (RBA) surprised markets, delivering the largest interest rate hike in 22 years and signaled more hikes were on the horizon.

The RBA raised its cash rate by 50 basis points to 0.85% at its June meeting earlier Tuesday, while surprising investors who had expected a 25 basis point to 40 basis point rate hike.

“Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today,” RBA Governor Philip Lowe said in a statement.

“The Board expects to take further steps in the process of normalising monetary conditions over the months ahead.”

The RBA had already raised rates for the first time since 2010 by 25 basis points last month and was largely expected to continue with quarter-point moves.

Initially, the AUD/USD pair advanced as high as 0.7247 before steadying around 0.7200, while three-year bond yields surged 16 basis points to 3.27%, or their highest level since 2012.

Markets have now priced in another 50 basis point hike in July and interest rates being near 1.5% by August.

“Our view is that rates will peak at higher levels than most anticipate and we’re expecting another 50bp hike in July and August,” Marcel Thieliant, a senior economist at Capital Economics, was quoted as saying by Reuters.

“With wholesale energy prices surging and business surveys pointing to a further acceleration in price pressures this quarter, we expect inflation to peak at over 7% in Q3. As such, we are comfortable with our above-consensus forecast that rates will peak at 3% by early-2023.”

Australia’s CPI inflation surged to a 20-year high of 5.1% during the first quarter and could move even higher in the current quarter amid soaring costs of energy, food, rents and home building.

As of 8:12 GMT on Tuesday AUD/USD was edging up 0.14% to trade at 0.7201. Last week the major Forex pair went up as high as 0.7283, which has been its strongest level since April 22nd (0.7376).

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 26.4 basis points (0.264%) as of 8:15 GMT on Tuesday, up from 15.8 basis points on June 6th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7203
R1 – 0.7220
R2 – 0.7248
R3 – 0.7265
R4 – 0.7281

S1 – 0.7175
S2 – 0.7158
S3 – 0.7130
S4 – 0.7102