AUD Holds Steady as Markets Brace for RBA Rate Hike

Financial markets are bracing for an almost certain interest rate rise, with futures traders, mainstream economists and firms including Pitcher Partners now in rare agreement that the Reserve Bank will lift the cash rate at its next meeting. The bigger question dividing analysts is no longer whether a hike is coming, but where the tightening cycle ultimately stops.

Traders are now pricing a terminal cash rate of around 5 per cent, which would mean roughly two and a half further rate rises once the expected move is included. For households with a mortgage, that points to borrowing costs climbing by at least half a percentage point from here, with roughly even odds the increase reaches three-quarters of a point. Either way, variable mortgage rates look set to push up towards the 7 per cent mark.

The Australian dollar was little changed in trading, extending a softer patch over the past fortnight. Zoom out, however, and the currency has essentially gone nowhere since the start of February, drifting on the back of shifting geopolitical currents rather than following any clear trend. Normally, expectations of further local rate rises would be expected to lift the currency, but a simultaneous rise in the US dollar has offset that effect, with the two currencies effectively climbing in tandem.

Australian shares were similarly flat and have traded in a holding pattern since early February, even as other major markets have pushed higher. Wall Street and London both rose on Friday, and Hong Kong markets advanced again, defying a broader increase in global bond yields that would usually weigh on equity valuations. The disconnect is being put down largely to continued investor enthusiasm for artificial intelligence, which bulls argue could deliver a substantial, if temporary, wealth boost even as longer-term risks around the technology remain unresolved.

Elsewhere in markets, oil prices jumped sharply after former US President Donald Trump rejected Iran's latest proposal over access to the Strait of Hormuz, a critical chokepoint for global crude shipments. Any threat to the strait tends to move energy markets quickly, given a large share of the world's seaborne oil trade passes through it.

On the budget front, figures showing a $6 billion improvement to the bottom line have been welcomed, but the context tempers the good news. That forecast was locked in on 12 May, a full six weeks before the books were finalised at the end of the financial year on 30 June. Measured against the time that had actually elapsed, the result could just as easily be read as a miss on where the budget was tracking — albeit a considerably smaller miss than the shortfall recorded a year earlier.