The Australian dollar has once again become a favoured carry trade currency, as yield differentials continue to widen in Australia's favour despite a resolutely dovish central bank.
Third-quarter CPI released Thursday showed underlying inflation is on the rise - with the Reserve Bank of Australia's favoured measure, the trimmed mean, climbing 0.70% quarter-on-quarter and 2.1% year-on-year, the highest since 2015 nAZN01QWID.
The reaction in the rates market was immediate. Refinitiv's RBAWATCHshows the market is pricing in close to three 25 basis-point hikes before the end of 2022, in defiance of the RBA's view that the next rate hike is unlikely to occur until 2024 at the earliest.
Inflation expectations are pushing up long-end yields with the 10-year Australian government bond yield trading as high as 1.88%, 25 basis points above its U.S. counterpart.
The RBA meets on Tuesday and may push back against the aggressive pricing of future rate hikes.
They have said repeatedly they will tolerate inflation moving into their 2%-3% target band without raising rates.
The RBA's main focus is on wage inflation and it consider the higher prices brought about by supply disruptions and home construction costs as "transitory"nL4N2RH1QA.
The AUD/USD appears poised to test the key 200-day moving average at 0.7560 ahead of the RBA meeting.
A break above that level targets the 61.8 Fibonacci retracement of the 2021 decline at 0.7663.
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