Australia dlr fades, even as RBA market bets must follow hawkish Fed

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SYDNEY, Jan 19 (Reuters) – The Australian and New Zealand dollars were under pressure on Wednesday as investors bet on ever more aggressive hikes in global interest rates, hitting local bond markets.

The Aussie was at $0.7186, after slipping 0.3% overnight and down from a recent two-month high at $0.7314. The break below $0.7200 is likely to retrace to the January low of $0.7130, with more support at $0.7082.

The Kiwi Dollar remained at $0.6771, after losing 0.4% overnight. This was well off last week’s high of $0.6890 and emphasized support at $0.6753 and $0.6733.

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Their US counterpart rose broadly as the market turned to the price of at least four rate hikes from the Federal Reserve this year.

Investors are betting the Reserve Bank of Australia (RBA) will have to follow, even though policymakers have long maintained that any move was unlikely this year.

The futures imply a 77% chance that the RBA will raise rates to 0.25% as early as May, and rise no less than five times this year to 1.25%.

The key will be consumer price figures for the December quarter due next week, where some analysts predict another outsized rise in core inflation.

“We expect there to be evidence of both demand pull and cost inflation,” warned Gareth Aird, head of the Australian economy at the CBA. “Input costs have risen in part due to supply-side bottlenecks, while strong demand will have allowed companies to raise prices at the consumer level.”

It predicts that the average adjusted measure of inflation will jump 0.9% in the quarter, the biggest increase since the start of 2009. That would take the annual rate to 2.5%, from 2.1%, the fastest pace in over seven years.

This would mean that core inflation was back in the middle of the RBA’s 2-3% target range more than a year earlier than expected.

“If the adjusted average matches our call, it would be a big upside surprise to their forecast,” Aird said.

“It will be the smoking gun that sees the RBA end the bond buying program at the February board meeting and abandon its cash rate forecast.”

The RBA is currently buying 4 billion Australian dollars ($2.88 billion) of bonds per week and plans to review this at the February 1 meeting, either extending until May or ending it altogether.

A potential end to the buying combined with the selling of Treasuries has pushed Australian 10-year bond yields to 1.99%, up 33 basis points so far this month.

($1 = 1.3912 Australian dollars)

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Editing by Simon Cameron-Moore

Our standards: The Thomson Reuters Trust Principles.

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