Aussie Dollar Slumps as Oil Prices Soar and Inflation Fears Mount
The Australian dollar is experiencing a setback due to a surge in oil prices, which has led investors to believe that more rate hikes are inevitable globally.
Fears of higher-for-longer inflation have pushed markets to price in a 90% chance that the Reserve Bank of Australia will raise rates later this month, causing bond yields to reach 15-year peaks.
Citi's head of Australian economics, Josh Williamson, expects two more rate hikes this year, lifting the terminal rate forecast to 4.85%. He believes the market is underpricing the risk of back-to-back RBA hikes necessary to control inflation.
The Reserve Bank of Australia has a cash rate of 4.35% and will meet on September 29. If it raises rates, bond markets are expected to react sharply, with three-year yields potentially jumping by 18 basis points to 5.050%, while 10-year yields could climb to 5.256%, their highest levels since mid-2011.
The Australian dollar was flat at $0.7161 after sliding 0.8% overnight, and the kiwi dollar was holding on at $0.5811 after losing 0.7% overnight to hit a six-week low of $0.5795.