Currency Point: How many keep climbing the hike mountain?


This week will be the continues the slew central banks raising official interest rates. The Reserve Bank of Australia will be the next cab of the rank when it raises rate on Tuesday.

However, be prepared for a ‘disappointment’ – there is growing place bets that the RBA could raise rates by 40 basis points (bps). However, if you listen to Governor Lowe, he only want to walk up the cash rate at 25bps lots. Thus, expect only a 25bps raise.

There is an interesting point to be made here. If you have lost control of one of your mandates (price stability) is it wise, then to loss another one (economic growth) just to try and catch the one you have lost? I actually think this is what the RBA is thinking.

Then we will have the Federal Reserve next week and all sign point to a 50bps rise. The May non-farm payrolls remained robust seeing 390,000 jobs added 333,000 of which were private payrolls all of which beat the median forecast of 318,000. The unemployment rate remained at 3.6 per cent. Average hourly earnings rose to 5.2 per cent year-on-year.
There is no doubt the US has full employment but also the wage growth to really push the point.

Listening to the Fed chatter last week what was also interesting was seeing someone like Vice-Chair Lael Brainard stating that she does not expect a pause in September. And adding her two cents that pricing for 50bp hikes in June and July ‘seems reasonable’.

Countering that was Cleveland Fed president Loretta Mester supporting the 50bp hikes in June and July but said wasn’t clear what will happen in September…”compelling evidence that inflation is moving down, then the pace of rate increases could slow…but if inflation has failed to moderate, then a faster pace could be needed.” A very each-way bet here.

All this saw the USD rise against all G10 currencies to start the week aided by higher yields and the employment data. EUR/USD fell back to the lower end of $1.07 at $1.0720 while GBP/USD fell to $1.2490. USD/JPY still following the real yield fundamentals rose to ¥130.85, its highest read since 9 May. While the AUD/USD fell 55 pips or -0.75% at $0.7210 watch for the RBA drop to move the dial here.

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