Aussie jumps on RBA hike, U.S. dollar steady

Aussie jumps on RBA hike, U.S. dollar steady

By Kevin Buckland and Samuel Indyk

LONDON (Reuters) – The Australian dollar jumped to its highest since mid-May on Tuesday 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 U.S. dollar was steady, below last week’s 2-1/2-month highs versus major peers, after unexpectedly soft U.S. services data on Monday firmed up expectations for a pause at the Federal Reserve’s meeting next week, but clouded the policy outlook for the months ahead.

The RBA raised the cash rate to an 11-year high of 4.1%, 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% at $0.6657, after leaping as high as $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 throw extra focus onto the Bank of Canada’s policy meeting on Wednesday after it refrained from rates rises in March and April, ING’s global head of markets Chris Turner said.

“A 25bp BoC rate hike tomorrow … would probably cause ripples across core bond markets around the world and could keep the dollar bid on the view that the Fed might be closer to hiking than first thought,” Turner added.

The U.S. dollar fell 0.2% against its Canadian counterpart to $1.3425.

CENTRAL FOCUS

Meanwhile, U.S. rates have been a central focus for investors globally, with recent data and Fed rhetoric causing volatility in the U.S. currency.

The dollar index – which measures the currency against six major peers – was steady at 104.04, after a shaky few days during which it rallied to a 2 1/2-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 June 14, and markets are now pricing in a 75% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to 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 U.S. 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-dollar,” Al-Saraf said, expecting euro-dollar to remain rangebound around 1.07.

Meanwhile, the dollar declined 0.3% to 139.16 yen, while sterling fell 0.1% to $1.2425.

Elsewhere, bitcoin attempted to find its feet around $25,715, after tumbling 5.1% on Monday in its biggest drop since April 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 U.S. customers from its platform and misled investors about its market surveillance controls.

(Reporting by Samuel Indyk and Kevin Buckland; Editing by Shri Navaratnam, Kim Coghill and Ed Osmond)