Tom Westbrook

SINGAPORE (Reuters – On Tuesday, the dollar remained below the recent highs as traders waited to see if the Reserve Bank of Australia would lead a series of central banks meetings to determine rates outlook for this week.

Surging inflation is looming above financial markets at the Federal Reserve, RBA and Bank of England.

Australia’s policy decision is published at 0330 GMT. Some guidance changes are expected, as the bank has failed to meet its yield goal due to recent bond sales.

A two-day Fed meeting will also be held on Tuesday. It is expected that the Fed will announce tapering its asset purchases. On Thursday, the BOE meets with all markets pricing in a slight rate increase.

Morning trade was quiet with the yen slightly lower at 114.11 dollars and the greenback suffering a minor overnight loss on euro after soft-than-expected U.S. industrial data.

Last week, the euro was worth $1.1599. After a wild week of selling domestic bonds, the euro had held steady at $0.7521. However, volatility gauges suggest a rough week.

Kim Mundy, analyst at Commonwealth Bank of Australia (OTC) stated that “The RBA meeting has been widely considered to be ‘live’ since the RBA failed in its defense of 0.1% bond yield targets on April 24, following stronger than anticipated inflation data last week.” 

We expect that the RBA will drop the 0.1% target, and also change its forward guidance about the time of the first cash rate hike from 2024 to 2025,” she stated. “We believe the AUD may fall if RBA isn’t as hawkish than market pricing. However, technical support could be found around $0.7379.

Analysts believe the bank could monitor moves in Australia’s counterpart. However, the wider market might also be aware of the bank’s tone regarding inflation since its U.S. peers and UK peers are facing similar problems.

In morning trading, the kiwi was slightly less volatile at $0.7177. Sterling fell at $1.3656, though it moved in a small manner ahead of both the Fed and BOE.

Steve Englander from Standard Chartered, head of G10FX at OTC, said that the “earthly elephant” in the room was headline inflation and underlying prices.

“We anticipate the Fed to declare that it is prepared to act decisively in the event inflation does not move towards tapering end’s target levels, however it will continue to expect inflation to decline as supply constraint eases. Investors will view this as moving forward the probable timing of Fed Rate hikes,” he stated.

We expect the FX markets will react to Fed’s implied threat that rates would move off zero, but we discount inflation optimism. All of this adds up in a dollar positive combination of higher real rate and greater risk-off position.

Also, traders position points to higher rates and speculators flocking to the shorten the yen.

Kit Juckes (OTC:), strategist for Societe Generale, stated that it is a betting that interest rates will move in favor of the yen even if they rise elsewhere.

The majority of people believe that the bond sale-off isn’t finished yet. To a lesser extent, they also believe that risk sentiment will be able to weather the event.

========================================================

Exchange rate bids starting at 0018 GMT

Description U.S. Close RIC Pct Change Pct High Low Bid

Changes in the past

Session

Euro/Dollar

$1.1598 $1.1607 $0.07% –5.07% +1.1607/+1.1599

Dollar/Yen

14.0150 113.9900 +0.05% +0.42% +114.1250+114.0500

Euro/Yen

132.23.29 132.29 +0.05% +4.18% +132.3900+132.2500

Dollar/Swiss

0.9095 0.9092 +0.03%+2.80%+0.9096 +0.9093

Sterling/Dollar

1.3662 -0.08%-0.08%+1.3669+1.3652

Dollar/Canadian

1.2375 1.2373 +0.00% +2.83% +1.2376 +1.2365

Aussie/Dollar

0.7520 0.7520 +0.02%-2.22%+0.7524 +0.7515

NZ

Dollar/Dollar 0.7176 0.7186 -0.13% -0.06% +0.7185 +0.7177

All locations

Tokyo’s best spots

Europe: The Best Places to Visit

Volatilities

Tokyo Forex market information from BOJ