AUD GBP Mixed as Central Banks Feel the Heat

AUD GBP Mixed as Central Banks Feel the Heat

The AUD GBP exchange rate was flat on Thursday as Australian dollar gains cooled. The pound had been seeing rate hike bets on higher inflation, but the Aussie dollar is catching up. The Reserve Bank also failed to buy the 2-yr 2024 yields and that rocked the bond market down under.

The AUD GBP exchange rate is trading at 0.5470 after the recent rally in Aussie.

UK to convene committee for article 16 fallout study

The UK government is activating a key government committee to look at the fallout from suspending cooperation over Northern Ireland, Sky News reported on Thursday.

Ministers are holding discussions inside the cabinet committee, which oversaw Brexit fallout preparations, about the potential effects of triggering Article 16, which allows the UK to ditch some parts of the Northern Ireland Protocol.

The move risks further tensions with European and could even lead to further Brexit-related woes for the pound sterling after a strong run on rate hike expectations and economic growth. Scientists are divided on the outlook for virus cases in the UK, but SAGE said 5k cases per day were possible before Christmas.

RBA refuses to defend its yield curve control levels

Australia’s central bank refused a chance to buy the 2-yr government bond that underpins its stimulus program and yield curve control measures. Yields soared above target and stoked market bets on an early hike in interest rates.

The Reserve Bank declined to buy the April 2024 bond in its regular market operations, even though yields are much higher than the target of 0.1%. The market responded by pushing the yields to 0.46%, as they expect the bank to act. The yield target is central to the RBA’s stimulus and the idea that the 0.1% cash rate will not rise until 2024. A failure to maintain that level fuels market wagers that rates will rise earlier.

“Markets are now pricing 50 basis points of tightening by mid next year, and 100 basis points by year end,” said Tapas Strickland, a director at NAB.

“To a central bank which is guiding rates unchanged until 2024 and targeting the April 2024 bond at 10 bps, it must be like watching a horror movie.”

The RBA is now under pressure to do something at its monthly policy meeting on November 3rd– either defend its yield curve target, soften it, or drop it.

“While we think it unlikely that the RBA will abandon it so soon, it’s a risk,” said Gareth Aird, head of economics at CBA. Aird now sees a first rate hike to 0.25% in November next year, compared to previous estimates of May 2023, followed by four more hikes to 1.25% by the third quarter of 2024.

“Overall, we expect it to be a shallow and gradual tightening cycle given the elevated level of household indebtedness.”

Westpac’s chief economist Bill Evans stuck with his call that rates would not rise until February 2023.
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