SYDNEY, Sept 14 (Reuters) - The Australian dollar slipped on Tuesday after the head of the country’s central bank dismissed market pricing of rate hikes in 2022 and 2023, even as he predicted a strong rebound for the economy into next year.
The Aussie eased 0.3% to $0.7344 as Reserve Bank of Australia (RBA) Governor Philip Lowe painted a very dovish policy outlook with no rate rises on the horizon until 2024.
“We continue to see the RBA lagging the global normalisation in rates given core inflation in Australia remains well below the RBA’s 2-3% target,” said Tapas Strickland, a director of economics at NAB.
“We expect that markets will continue to price some chance of the RBA hiking rates in the second half of 2023,” he added. “Our central view remains that the first interest rate rise will be in 2024.”
Overnight index swaps eased on the comments, with two-year rates off 2 basis points at 0.14% and closer to the current cash rate of 0.10%.
Markets are much more confident the U.S. Federal Reserve will be hiking in late 2022 and 2023, which is allowing Australian bonds to outperform Treasuries.
Yields on domestic 10-year paper are 7 basis points below U.S. yields at 1.26%, undermining the Aussie’s traditional attraction as a “high yielder”.
Lowe did say the RBA would keep tapering its bond buying over time and would likely stop altogether sometime next year in line with several other central banks.
Markets are certain the Reserve Bank of New Zealand (RBNZ) will start hiking its rates much sooner - as early as next month - which is providing the kiwi with yield support.
New Zealand 10-year yields are up at 1.89% and 56 basis points above Treasuries, a level not sustained for any length of time since 2017.
The kiwi was holding at $0.7108 and well above its August trough of $0.6807.
Its relative yield advantage over the Aussie has seen the kiwi appreciate steadily for the past three months to hit a 16-month top at NZ$1.0313 per AUD.
Figures out Tuesday showed home prices rising at an annual 25.7% in August while data out later this week are expected to show the economy grew a solid 1.3% in the June quarter, and more than 16% for the year.
(Editing by Lincoln Feast.)