Currencies wait for RBA to kick off central bank big week

The dollar hovered below recent highs on Tuesday as traders waited for the Reserve Bank of Australia to lead a handful of central bank meetings to set the rate outlook this week.

The RBA, Federal Reserve and Bank of England are all facing soaring inflation that threatens financial markets.

Australia releases its policy decision at 03:30 GMT and some sort of change of direction is expected after the bank has failed to defend its return target as bonds have sold off in recent sessions.

The Fed also begins a two-day meeting later on Tuesday, where it is expected to announce the reduction in its asset purchases, and the BOE is meeting on Thursday with markets almost forecasting a slight rate hike.

Movements were light in morning trading, with the yen slightly weaker at 114.11 per dollar and the greenback suffered a small overnight loss against the euro, following weaker US manufacturing data than planned.

The euro last bought $ 1.1599. The Aussie, which had been stable for about a week of wild selling in the domestic bond market, held steady at $ 0.7521, although volatility gauges point to a turbulent week.

“RBA meeting widely seen as ‘live’ after RBA failed to defend its 0.1% bond yield target on April 24 following stronger-than-expected inflation data last week, “Commonwealth Bank of Australia analyst Kim Mundy said.

“We expect the RBA to drop the 0.1% target while also changing its forecast on the timing of the first policy rate hike from 2024,” she said. “In our view, the AUD may fall if the RBA is not as hawkish as market prices, but can find support around the technical level of $ 0.7379.”

Analysts said the kiwi could follow the moves of its Australian counterpart, while the broader market may also be sensitive to the bank’s tone in fighting inflation as its US and UK peers face challenges. similar dilemmas.

The kiwi was slightly weaker at $ 0.7177 in morning trading. The British pound was also down at $ 1.3656, but moves were weak ahead of the Fed and BOE.

“The elephant in the room is headline and core inflation, which are higher than the Fed expected,” said Steve Englander, head of G10 FX at Standard Chartered.

“We expect the (Federal Open Market Committee) to say that the Fed is ready to act decisively if inflation does not approach target levels at the end of the cut, but it does. still expects inflation to come down as supply constraints ease. We think investors will see it as advancing the likely timing of the Fed’s rate hikes, “he said.

“We expect the currency markets to react to the Fed’s implicit threat of a zero rate cut, but dismiss inflation optimism. This adds to a positive combination for the dollar of higher real rates and increased risk positions. “

Traders’ positioning also points to higher rate bets as speculators rush to sell the yen.

“It’s a bet that interest rate trends will continue to move against the yen as they rise elsewhere, particularly in the United States,” said Kit Juckes, strategist at Societe Generale.

“In other words, there is a majority who think the bond selloff is not over yet. It is also, to a lesser extent, a bet that the sense of risk will survive the experience.”